M/s. ICICI SECURITIES LTD., MUMBAI V. ADDL. CIT. Rg. - 3(2), MUMBAI

ITA 884/MUM/2007

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100882 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 22-12-2014
• Assessment Year: 2002-2003
• Appeal Filed On: 29-01-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J D MISTRI
• Assessee Lawyers: K RAVIKIRAN; GOLI SRINIVAS RAO
• Keywords: Capital asset; Depreciation; Business expenditure; Earning of tax free income; Date of conversion; Speculation loss; Bad and doubtful debts; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 45(2); 14A; 37(1)

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO . 4325/MUM/2004 ASSESSMENT YEAR: 2000-01 ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 / VS. DCIT, RANGE 3(2) MUMBAI- ( !'# /ASSESSEE) ( / REVENUE) P.A. NO. AAACI0995H ITA NO. 4829/MUM/2004 ASSESSMENT YEAR: 2000-01 DCIT, RANGE 3(2) MUMBAI- / VS. ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG, CHURCHGATE, MUMBAI -400020 ( / REVENUE) ( $%&' /RESPONDENT) P.A. NO. AAACI0995H ICICI SECURITIES PRIMARY D. LTD 2 ITA NO.5309/MUM/2006 ASSESSMENT YEAR: 2000-01 ACIT, RANGE 3(2) MUMBAI- / VS. ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 ( / REVENUE) ( $%&' /RESPONDENT) P.A. NO. AAACI0995H ITA NO . 4103/MUM/2005 ASSESSMENT YEAR: 2001-02 ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 / VS. ACIT, RANGE 3(2) MUMBAI- ( !'# /ASSESSEE) ( / REVENUE) P.A. NO. AAACI0995H ITA NO.4152/MUM/2005 ASSESSMENT YEAR : 2001-02) ACIT, RANGE 3(2) MUMBAI- / VS. ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 ( / REVENUE) ( $%&' /RESPONDENT) P.A. NO. AAACI0995H ICICI SECURITIES PRIMARY D. LTD 3 ITA NO.884/MUM /2007 ASSESSMENT YEAR : 2002-03) ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 / VS. ACIT, RANGE 3(2) MUMBAI- ( !'# /ASSESSEE) ( / REVENUE) P.A. NO. AAACI0995H ITA NO.928/MUM/2007 ASSESSMENT YEAR : 2002-03) ACIT, RANGE 3(2) MUMBAI- / VS. ICICI SECURITIES PRIMARY DEALERSHIP LIMITED(FORMERLY AS ICICI SECURITIES LTD.), ICICI CENTRE, H.T. PAREKH MARG,CHURCHGATE, MUMBAI -400020 ( / REVENUE) ( $%&' /RESPONDENT) P.A. NO. AAACI0995H !'# / ASSESSEE BY SHRI K.RAVI KIRAN & SHRI GOLI SRINIVAS RAO / REVENUE BY SHRI J. D. MISTRI & SHRI NIRAJ SHETH ( ) * + / DATE OF H EARING : 13/08/2015 ! * + / DATE OF ORDER: 15/09/2015 ICICI SECURITIES PRIMARY D. LTD 4 ! / O R D E R PER BENCH: THIS IS A BATCH OF 7 APPEALS FILED BY THE REVENUE A ND ASSESSEE AGAINST THE ORDERS OF THE LD. COMMISSIONER OF INCOM E TAX (APPEALS), MUMBAI PASSED FOR THE ASSESSMENT YEARS 2 000-01, 2001-02 & 2002-03. SINCE COMMON ISSUES ARE INVOLVED , THESE ARE BEING DISPOSED OF TOGETHER BY THIS COMMON ORDER . ASSESSEES APPEAL IN ITA NO 4325/MUM/2004 AND REVENUES APPEAL IN ITA NO.4829/MUM/2004: THESE ARE CROSS APPEALS FILED BY THE REVENUE AND AS SESSEE AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) { HEREINAFTER CALLED AS LD. CIT(A)}, DATED 18.03.20 04 FOR THE ASSESSMENT YEAR 2000-01. GROUNDS RAISED BY THE ASS ESSEE AND REVENUE ARE ADJUDICATED AS UNDER: 1. GROUND NO.1 OF THE ASSESSEES APPEAL: THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING TH E ACTION OF THE ASSESSING OFFICER ( HEREINAFTER CALLED AS AO ), IN DISALLOWING A SUM OF RS.14,51,00,000/- U/S 14A OF T HE INCOME TAX ACT 1961, OUT OF INTEREST EXPENDITURE, CLAIMED AS DEDUCTION BY THE ASSESSEE. 1.1. BRIEF FACTS, AS CULLED OUT FROM THE ORDERS OF THE AUTHORITIES BELOW, ARE THAT THE ASSESSEE COMPANY IS A NON BANKING FINANCE COMPANY AND MERCHANT BANKER, CARRIE D OUT TRADING IN SHARES AND SECURITIES. DURING THE COURSE OF ICICI SECURITIES PRIMARY D. LTD 5 ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE AS SESSEE COMPANY RECEIVED HUGE AMOUNT OF DIVIDEND AND IT WAS OBSERVED BY HIM FROM THE BALANCE SHEET OF THE ASSES SEE COMPANY THAT ASSESSEE HAD RECEIVED DIVIDEND INCOME ON STOCK- IN- TRADE AMOUNTING TO RS.32.053 CRORES. IT WAS FURTHER OBSERVED BY HIM THAT ENTIRE DIVIDEND INCOME WAS CLA IMED AS EXEMPT IN THE RETURN OF INCOME FILED BY THE ASSESSE E COMPANY. HE OBSERVED THAT THE ASSESSEE COMPANY DID NOT ATTRI BUTE ANY EXPENSE TOWARDS EARNING OF SUCH EXEMPTED INCOME. IN VIEW OF THESE CIRCUMSTANCES, THE AO, AFTER EXAMINING ACCOUN TS OF THE ASSESSEE AND THE FACTS OF THE CASE, OBSERVED THAT T HE TOTAL INCOME EARNED BY ASSESSEE COMPANY WAS TO THE TUNE O F RS.2,737.38 MILLION AND DIVIDEND INCOME EARNED DURI NG THE YEAR WAS RS.320.53 MILLION, WHICH WAS 11.70% OF THE TOTAL INCOME FROM OPERATIONS. THE ASSESSEE COMPANY HAD IN CURRED TOTAL INTEREST EXPENSES OF RS.1,450.96 MILLION, OUT OF THIS, DISALLOWANCE WAS MADE BY HIM @ 11.70% OF THESE INTE REST EXPENSES WHICH AMOUNTED TO RS.145.10 MILLION I.E. 1 4.51 CRORES, ON THE GROUND THAT THIS WAS AMOUNT OF INTER EST PAID BY THE ASSESSEE COMPANY ON THE FUNDS BORROWED FOR EARN ING DIVIDEND INCOME. DETAILED DISCUSSION HAS BEEN MAD E ON THIS ISSUE IN PAGE NOS. 2 TO 9 OF THE ASSESSMENT ORDER. 1.2. THE ASSESSEE CONTESTED THIS MATTER BEFORE LD. CIT(A) AND INTER ALIA SUBMITTED THAT OWN FUNDS OF THE ASSESSE COMPANY WERE MUCH MORE THAN THE AMOUNT OF INVESTMENT IN TAX FREE SECURITIES AND NO BORROWED FUNDS WERE USED FOR THIS PURPOSE AND THEREFORE, NO DISALLOWANCE COULD HAVE BEEN MADE UNDER ICICI SECURITIES PRIMARY D. LTD 6 THIS ACT OUT OF INTEREST EXPENDITURE. THE LD. CIT(A ) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE BUT CONFIRMED THE DISALLOWANCE, BY MAKING BRIEF DISCUSSION IN PARA 2. 10 OF THE APPELLATE ORDER. THE LD. CIT(A) ENDORSED THE FINDIN GS OF THE AO WITHOUT GIVING HIS INDEPENDENT FINDINGS OR ANALYSIS AND HELD THAT AS PER BALANCE SHEET OF THE ASSESSEE COMPANY , THE AGGREGATE AMOUNT OF INVESTMENT WAS IN EXCESS OF THE OWN FUNDS OF THE ASSESSEE COMPANY AND THUS AO WAS JUS TIFIED IN MAKING DISALLOWANCE OUT OF INTEREST EXPENDITURE. 1.3. BEFORE US, LD. COUNSEL OF THE ASSESSEE HAS VEH EMENTLY CONTESTED THE ORDERS OF LD. CIT(A) AS WELL AS AO. I T HAS BEEN ARGUED BY HIM THAT BOTH OF THE LOWER AUTHORITIES H AVE MADE FACTUAL MISTAKES IN ANALYSING THE BALANCE SHEET OF THE ASSESSEE COMPANY. IT WAS SUBMITTED BY HIM THAT THE ASSESSEE COMPANY HAD SUFFICIENT FUNDS TO MAKE INVESTMENT IN THE SHARES/SECURITIES EARNING TAX FREE DIVIDEND. HE HAS SUBMITTED A CHART SHOWING BREAK UP AND ANALYSIS OF THE AMOUNT OF INVESTMENT MADE IN SHARES AND OWN FUNDS OF THE ASSE SSEE COMPANY. FOR THE SAKE OF READY REFERENCE, THIS CHAR T IS REPRODUCED BELOW: ICICI SECURITIES PRIMARY D. LTD 7 ICICI SECURITIES PRIMARY DEALERSHIP LIMITED (OWN FU NDS WORKING FOR SECTION 14A PREVIOUS YEAR: 1999- 2000 ASSESSMENT YEAR: 2000- 01 PREVIOUS YEAR: 2000- 2001 ASSESSMENT YEAR: 2001- 02 PREVIOUS YEAR: 2001- 2002 ASSESSMENT YEAR: 2002- 03 SR. NO. PARTICULARS F.Y.1999- 00 F.Y.2000- 01 F.Y.2001-02 A.Y.2000- 01 A.Y.2001- 02 A.Y.2002-03 RS. IN MILLION SECURITIES HELD AS STOCK IN TRADE 1 TAXABLE 15,068.65 11,140.73 18,214.70 2 TAX-FREE --- 144.23 186.60 644.7 2 TOTAL 15,212.88 11,327.33 18,859 .42 SECURITIES HELD AS INVESTMENT 3 TAXABLE 184.61 469.06 481.42 4 TAX-FREE 45.02 45.02 45.01 5 SHARE CAPITAL 2,030.03 2,030.03 2,030.03 6 RESERVES & SURPLUS 525.04 701.51 1,1 61.85 TOTAL OWN FUNDS(5+6) 2,555.07 2,731.54 3,191.88 TOTAL TAX - FREE INVESTMENTS (2+4) 189.25 231.62 689.73 TOTAL TAXABLE INVESTMENTS (1+3) 15,253.26 11,609.79 18,696.1 7 OWN FUND (INCREMENTAL) 224.66 176.47 460.34 8 DEPRECIATION 52.61 48.74 13.44 TOTAL OWN CASH FUND(7+8) 277.27 225.21 473.78 ON THE BASIS OF THE AFORESAID CHART, IT WAS ARGUED BY THE LD. COUNSEL THAT THE FACTS HAVE BEEN OVERLOOKED OR MISU NDERSTOOD BY BOTH OF THE LOWER AUTHORITIES. HE RELIED UPON F OLLOWING ICICI SECURITIES PRIMARY D. LTD 8 JUDGMENTS IN SUPPORT OF HIS ARGUMENT THAT IF OWN FU NDS ARE MORE THAN THE TAX FREE INVESTMENTS, THEN PROPORTION ATE AMOUNT OF INTEREST CANNOT BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 14A: I.CIT VS. HDFC BANK LTD. (366 ITR 505) (BOMBAY) II.DLT VS. BNP PARIBAS SA (214 TAXMAN 548) (BOMBAY) III. M/S. CEAT LIMITED, VS. ACIT (ITA NO.824/MUM/20 12 (AY. 2008-09)) IV. SHOPPER'S STOP LTD. VS. ACIT (ITA NO. 1448 & 4475/MUM/2010 AY 06-07 AND AY 07-08) V. BHARAT BIJLEE LTD. V. ACIT (ITA 4160/M/2012) (AY 2008-09) COPIES OF AFORESAID JUDGMENTS WERE ALSO PLACED AND READ OUT BEFORE US, DURING THE COURSE OF HEARING. 1.4. ON THE OTHER HAND, LD DEPARTMENTAL REPRESENTAT IVE RELIED UPON THE ORDERS OF LD. CIT(A) AND AO ON THIS ISSUE, BUT HE WAS FAIR ENOUGH TO STATE THAT THERE WAS NO FACTUAL MIST AKE IN THE AFORESAID WORKING SHEET SUBMITTED BY THE LD. COUNSE L OF THE ASSESSEE. 1.5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE PAPER BOOK CONTAINING BALANCE SHEET, PROFIT & LOSS ACCOUNT AND FEW OTHER DOCUMENTARY EVIDENCES, AS WERE SHOWN TO US DURING THE COURSE OF HEARING. WE HAVE ALSO MADE ANA LYSIS OF THE WORKING SHEET SUBMITTED BY THE LEARNED COUNSEL SHOWING AGGREGATE AMOUNT OF TAX FREE INVESTMENT AND AGGREGA TE ICICI SECURITIES PRIMARY D. LTD 9 AMOUNT OF OWN FUNDS OF THE ASSESSEE COMPANY. IT APP EARS TO US THAT WHILE MAKING ANALYSIS OF THE BALANCE SHEET, THE LOWER AUTHORITIES HAVE INADVERTENTLY TAKEN THE AGGREGATE AMOUNT OF SECURITIES HELD AS STOCK-IN-TRADE AND SECURITIES HELD AS INVESTMENT, WITHOUT FURTHER LOOKING INTO BIFURCAT ION OF TAXABLE AND TAX FREE INVESTMENTS, FOR THE PURPO SE OF WORKING OUT THE AMOUNT TO BE DISALLOWED U/S 14A. IF SOME DI SALLOWANCE WAS REQUIRED TO BE MADE, AS PER LAW, THEN, ONLY THE AMOUNT OF TAX FREE INVESTMENTS WAS TO BE CONSIDERED. ANALYS IS OF THE AFORESAID DETAILS CLEARLY SUGGEST THAT THE TOTAL AM OUNT OF TAX FREE INVESTMENT WAS AGGREGATING TO RS.189.25 MILLI ONS AS AGAINST AGGREGATE AMOUNT OF OWN FUNDS OF THE ASSE SSEE TO THE TUNE RS.2,555.07 MILLIONS. THUS, APPARENTLY THE AMO UNT OF OWN FUNDS IS IN FAR EXCESS OF AMOUNT OF TAX FRE E INVESTMENTS OF THE ASSESSEE COMPANY. IN OTHER WORDS, THE ASSESS EE COMPANY HAS GOT SUFFICIENT AMOUNT OF SURPLUS FUNDS. FURTHER, OUR ATTENTION WAS ALSO DRAWN TO THE BALANCE SHEET O F THE ASSESSEE COMPANY AVAILABLE AT PAGE NO.1 TO 10 OF TH E PAPER BOOK FILED BY THE ASSESEE COMPANY. WE FOUND THAT TH E FIGURES SHOWN IN THE AFORESAID CHART, SUBMITTED BY THE LD. COUNSEL, DULY TALLY WITH THE FIGURES SHOWN IN THE BALANCE SH EET. THUS, CLAIM OF THE ASSESSEE THAT AMOUNT OF OWN FUNDS OF THE ASSESSEE COMPANY ARE IN FAR EXCESS OF THE AMOUNT OF TAX FREE INVESTMENT APPEAR TO BE FACTUALLY CORRECT TO US. LD . DR ALSO COULD NOT POINT OUT ANY MISTAKE THEREIN. 1.6. HAVING CONSIDERED AND EXAMINED THESE FACTS AND UNDER THESE CIRCUMSTANCES, LET US NOW ANALYSE THE LATEST POSITION OF ICICI SECURITIES PRIMARY D. LTD 10 LAW IN THIS REGARD. HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF HDFC BANK LTD., SUPRA HAS HELD THAT WHERE T HE ASSESSEES OWN FUNDS AND OTHER NON-INTEREST BEARING FUNDS WERE MORE THAN INVESTMENT IN TAX FREE SECURITIES, T HEN NO DISALLOWANCE WAS REQUIRED TO BE MADE OUT OF THE INT EREST EXPENSES U/S 14A. HONBLE HIGH COURT HAS RELIED UPO N ANOTHER JUDGMENT OF HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. 313 ITR 340 (BOM), RELEVANT PARA OF THE JUDGMENT IS REPRODUCED BELOW: WE FIND THAT THE FACTS OF THE PRESENT CASE ARE SQU ARELY COVERED BY THE JUDGMENT IN THE CASE OF RELIANCE UTI LITIES & POWER LTD. (SUPRA). THE FINDING OF FACT GIVEN BY TH E ITA T IN THE PRESENT CASE IS THAT THE ASSESSEE'S OWN FUNDS A ND OTHER NON-INTEREST BEARING FUNDS WERE MORE THAN THE INVES TMENT IN THE TAX-FREE SECURITIES. THIS FACTUAL POSITION I S NOT ONE THAT IS DISPUTED. IN THE PRESENT CASE, UNDISPUTEDLY THE ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CU RRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN THE TAX- FREE SECURITIES. IN VIEW OF THIS FACTUAL POSITION, AS PER THE JUDGMENT OF THIS COURT IN THE CASE OF RELIANCE UTIL ITIES & POWER LTD. (SUPRA), IT WOULD HAVE TO BE PRESUMED TH AT THE INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE. SIMILARLY, OTHER JUDGMENTS QUOTED BY THE LEARNED CO UNSEL ALSO SUPPORT THIS VIEW. KEEPING IN VIEW ALL THESE FACTS AND EVIDENCES BROUGHT BEFORE US AND THE POSITION OF LAW COMING OUT FROM THE AFORESAID JUDGMENTS QUOTED BEFORE US, WE HOLD THAT THE AMOUNT OF DISALLOWANCE MADE BY THE AO FOR RS.14.51 CRORES IS CONTRARY TO LAW AND FACTS. CONSEQUENTLY, THE SAME IS DIRECTED TO BE DELETED, THEREFORE GROUND NO.1 OF TH E ASSESEES APPEAL IS ALLOWED. ICICI SECURITIES PRIMARY D. LTD 11 2. GROUND NO.2 , THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING THE ACTION OF THE AO IN DIS ALLOWING 21% OF BROKERAGE, STAMP DUTY AND CUSTODIAL SERVICES CHARGES CLAIMED AS DEDUCTION BY THE ASSESSEE COMPANY, ON TH E GROUND THAT THE SAID EXPENDITURE WAS INCURRED FOR THE PURP OSE OF EARNING TAX FREE INCOME. 2.1. THE AO HAS DISCUSSED THIS ISSUE AT PAGE NO.9 A ND 10 OF THE ASSESSMENT ORDER, WHEREIN IT WAS OBSERVED BY TH E AO THAT 50% OF THE TOTAL AMOUNT OF DIRECT EXPENSES AGGREGAT ING TO RS.16.60 MILLION UNDER THE HEAD BROKERAGE AND CUSTO DIAL SERVICES WAS TO BE DISALLOWED, HAVING BEEN INCURRED FOR EARNING THE EXEMPT INCOME AND ACCORDINGLY A SUM OF RS. 8.30 MILLION WAS DISALLOWED. 2.2. BEFORE THE LD. CIT(A), THE ASSESSEE HAS SUBMIT TED THAT EXPENSES ON BROKERAGE, STAMP DUTY AND CUSTODIAL CHA RGES WERE NOT DIRECT EXPENSES FOR EARNING TAX FREE INCO ME AND IT WAS FURTHER SUBMITTED THAT THESE EXPENSES WERE INCU RRED IN RELATION TO GOVERNMENT SECURITIES, INTER CORPORATE DEPOSITS, AND OTHER DEED INSTRUMENTS, INCOME FROM WHICH IS TAXABL E. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, LD. CI T(A) DELETED THE AMOUNT OF RS.78,49,487/- BEING THE AMOUNT OF BR OKERAGE PAID FOR THE GOVERNMENT SECURITIES, ICD & OTHER DEB T INSTRUMENTS, BUT CONFIRMED THE DISALLOWANCE OUT OF THE AMOUNT OF BROKERAGE PAID FOR EQUITY SHARES AMOUNTIN G TO RS.78,600/- AND THE STAMP DUTY OF RS. RS.3,46,250/- . THE ASSESSEE HAS FILED THE APPEAL AGAINST THE AMOUNT SU STAINED BY ICICI SECURITIES PRIMARY D. LTD 12 THE LD. CIT(A), WHEREAS THE REVENUE HAS ACCEPTED TH E ORDER OF LD. CIT(A) ON THIS ISSUE. 2.3. BEFORE US, LD. COUNSEL HAS VEHEMENTLY ASSAILED THE ORDER OF LD. CIT(A) AND CONTENDED THAT BROKERAGE EXPENSE S ARE NOT INCURRED FOR EARNING DIVIDEND BUT FOR THE PURPOSE O F ACQUIRING INVESTMENTS. IN SUPPORT OF HIS ARGUMENT, HE HAS REL IED UPON FOLLOWING JUDGMENTS: I.CIT VS. GENERAL INSURANCE CORPORATION (254 ITR 20 3) II.CIT VS. CENTRAL BANK OF INDIA (130 TAXMAN 116) III. CIT VS. MODEM TERRY TOWERS LTD. (43S TAXMANN.C OM 466)(2014) IV. CIT VS. UNITED COLLIERIES (203 ITR 857). HE HAS PLACED COPIES OF JUDGMENT AND HAS READ OUT T HE RELEVANT PORTION OF THESE JUDGMENTS. ON THE OTHER H AND, LD. DR HAS RELIED UPON THE ORDER OF LD. CIT(A). 2.4. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE T HROUGH THE COPIES OF JUDGMENTS PLACED BEFORE US ON THIS IS SUE. IT IS OBSERVED BY US THAT THE LD. CIT(A) HAS BEEN QUITE F AIR IN DELETING THE DISALLOWANCE OF RS.78,49,487/- MADE OU T OF THE BROKERAGE EXPENDITURE OF RS.1,56,98,973/-, ON THE G ROUND THAT THESE WERE PAID FOR GOVERNMENT SECURITIES, ICD & OT HER DEBT INSTRUMENTS. WITH RESPECT TO OTHER EXPENDITURE AGGR EGATING TO RS.9,09,960/-, IT IS NOTED THAT ADMITTED CASE OF TH E ASSESSEE IS THAT THESE HAVE BEEN INCURRED FOR THE PURPOSE OF AC QUISITION OF SHARES. LD. CIT(A) HAS BEEN VERY REASONABLE IN RES TRICTING THE ICICI SECURITIES PRIMARY D. LTD 13 DISALLOWANCE TO 21% OF THE SAID AMOUNT OF EXPENSES. THUS, THE DISALLOWANCE SUSTAINED IS NOW OF A VERY MINISCULE A MOUNT. THE ARGUMENT OF THE LD COUNSEL, THAT NO AMOUNT AT A LL CAN BE CORRELATED WITH THE DIVIDEND INCOME, IS NOT ACCEPTA BLE. THUS, ON THIS ISSUE WE FIND THAT ORDER OF LD. CIT(A) IS Q UITE JUSTIFIED AND NO INTERFERENCE IS CALLED FOR AND THEREFORE GRO UND NO.2 OF THE ASSESSEES APPEAL IS DISMISSED. 3. GROUND NO.3 OF THE ASSESSEES APPEAL AND GROUND NO.1 OF THE REVENUES APPEAL DEAL WITH THE AD HOC DISALL OWANCE OF RS.25.01 MILLION MADE BY THE AO OUT OF WHICH A SUM OF RS.91,16,975/- WAS DELETED BY THE CIT(A) AND THE BA LANCE AMOUNT WAS CONFIRMED BY THE LD. CIT(A). AGAINST THE AMOUNT DELETED, REVENUE IS IN APPEAL BEFORE THE TRIBUNAL A ND AGAINST THE AMOUNT CONFIRMED, THE ASSESSEE HAS FILED AN APP EAL BEFORE THE TRIBUNAL. THE AO HAS DISCUSSED THIS ISSUE AT PA RA 10 OF THE ASSESSMENT ORDER. IT HAS BEEN HELD BY THE LD. AO TH AT MAKING INVESTMENT IN SHARES/SECURITIES, BONDS ETC. WERE PU RELY PROFESSIONAL ACTIVITY. IT REQUIRES MUCH MORE SKILL THAN JUST BY INVESTING BLINDLY IN ANY SHARES AND SECURITIES AND THEREFORE A COMPLETE RESEARCH AND THOROUGH STUDIES BY HIGHLY CO MPETENT PEOPLE WITH ADEQUATE MODERN AMENITIES AND PROPER SO FTWARE WERE REQUIRED. IT WAS FURTHER OBSERVED BY THE AO TH AT DIVIDEND YIELD WAS ONE OF THE MAJOR COMPONENTS OF INVESTMENT DECISION. IN VIEW OF THESE CIRCUMSTANCES, AO REJECTED THE CON TENTION OF THE ASSESSEE THAT INDIRECT EXPENSES HAVE NO RELEVAN CE TO DIVIDEND INCOME AND CANNOT BE ACCEPTED IN TOTO. ACC ORDINGLY THE AO HELD AFTER DUE CONSIDERATION AND DELIBERATIO N REGARDING ICICI SECURITIES PRIMARY D. LTD 14 THE NATURE OF BUSINESS OF THE ASSESSEE COMPANY AND THE TYPE OF EXPENSES INCURRED BY THE ASSESSEE COMPANY THAT A SUM OF RS.25.01 MILLION BEING 5% OF THE INDIRECT EXPENSES AGGREGATING TO RS.500.33 MILLION WAS REQUIRED TO BE DISALLOWED AND ACCORDINGLY THE DISALLOWANCE WAS MADE FOR THE AFORE SAID PROPORTIONATE AMOUNT. 3.1. THE ASSESSEE CONTESTED THE ISSUE BEFORE THE LD . CIT(A). THE LD. CIT(A) DISCUSSED THIS ISSUE AT PAGE 9 PARA 2.12 OF THE APPELLATE ORDER WHEREIN THE LD. CIT(A) HELD AS UNDE R: 2.12 AS REGARDS, THE AD HOC DISALLOWANCE OF RS. 2,50,10,0001-, I FIND THAT THE-AT) DOES NOT SEEMS T O HAVE TAKEN NOTE OF THE SUO MOTO DISALLOWANCE OF RS.18,23,39,510/-- MADE OUT OF INDIRECT EXPENSES AN D HAS DISALLOWED 5% OF THE TOTAL INDIRECT EXPENSES. THIS WAS THE ESTIMATE OF INDIRECT EXPENSES INCURRED FOR EARNING TAX FREE INCOME. THIS DISALLOWANCE HAS RESULTED IN DOUBLE TA XATION TO THE EXTENT OF 5% OF RS. 18,23,39,5101-. THERE IS SU BSTANTIAL FORCE IN THE APPELLANT'S SUBMISSION. ACCORDINGLY TH E AO IS DIRECTED TO DELETE THE DISALLOWANCE AMOUNTING 'TO R S. 91,16,975/- BEING 5% OF RS. 18,23,39,510/- OUT OF AGGREGATE DISALLOWANCE OF RS. 2,50,10,000/- MADE BY THE AO. THE APPELLANT GETS PART RELIEF IN REGARD TO THI S COMPONENT OF DISALLOWANCE ALSO. IN VIEW OF THE FORE GOING, WHILE THE DISALLOWANCE CHALLENGED IN GROUND NO.1 IS BEING UPHELD, THE APPELLANT GETS PART RELIEF IN GROUND NO .2 & 3. ALL THE THREE GROUNDS ARE THUS DECIDED IN THE LIGHT OF THE ABOVE DISCUSSION. 3.2. BOTH OF THE PARTIES HAVE FILED APPEAL AGAINST THE ORDER OF LD. CIT(A) ON THIS ISSUE. BEFORE US, THE LD. COUNSE L HAS ARGUED THAT CONSISTENT VIEW IS BEING TAKEN BY THE TRIBUNAL IN CASES OF OTHER ASSESSEES, HOLDING THAT 1 TO 2 % OF THE AM OUNT OF ICICI SECURITIES PRIMARY D. LTD 15 EXEMPT INCOME IS LIABLE TO BE DISALLOWED TOWARDS PO RTION OF INDIRECT EXPENSES U/S 14A. 3.3. WE HAVE CONSIDERED RIVAL SUBMISSIONS MADE BY B OTH THE PARTIES AND HAVE GONE THROUGH ORDERS PASSED BY LOWE R AUTHORITIES ON THIS ISSUE AND NOTE THAT LD CIT(A) HAS MADE A MENTION OF SOME SUO MOTO DISALLOWANCE OF RS.18,23,3 9,510/- MADE OUT OF INDIRECT EXPENSES BY THE ASSESSEE IN IT S RETURN OF INCOME. WE COULD NOT LOCATE ANY SUCH DISALLOWANCE I N THE RETURN OF INCOME OF THE ASSESSEE, ENCLOSED IN THE P APER BOOK. THEREFORE, WE HAD RAISED A POINTED QUERY TO LD. CO UNSEL TO SHOW US FROM THE RETURN OF THE ASSESSEE, WHETHER AN Y SUO MOTO DISALLOWANCE OF RS.18,23,39,510/- HAS BEEN MADE OUT OF INDIRECT EXPENSES, WHICH HAS BEEN CONSIDERED BY THE LD. CIT(A) IN THE APPEAL ORDER. IN RESPONSE, THE LD. CO UNSEL FAIRLY STATED THAT NO SUO MOTO DISALLOWANCE HAS BEEN MADE BY THE ASSESSEE COMPANY IN THE COMPUTATION SHEET FILED ALO NG WITH RETURN OF INCOME, AND IT SEEMS THAT LD CIT(A) HAS M ENTIONED IT SO IN HIS ORDER, BY MISTAKE . WE HAVE OURSELVES SE EN THE COMPUTATION SHEET OF INCOME ENCLOSED AT PB-11-12 OF THE PAPER BOOK FILED BY THE ASSESSEE COMPANY. IT IS NOT ED BY US THAT NO SUCH DISALLOWANCE HAS BEEN MADE IN THE COMP UTATION SHEET AS HAS BEEN MENTIONED BY THE LD. CIT(A) IN IT S ORDER WITH RESPECT TO PROPORTIONATE INDIRECT EXPENSES DISALLOW ABLE U/S 14A. UNDER THIS MISTAKEN BELIEF, LD. CIT(A) HAS PRE SUMED THAT THE DISALLOWANCE MADE BY AO HAS RESULTED IN DOUBLE TAXATION. WE FIND THAT THE BASIC PREMISE OF THE LD. CIT(A) AP PEARS TO BE FACTUALLY INCORRECT. THERE SEEMS TO BE SOME ERROR I N MIS- ICICI SECURITIES PRIMARY D. LTD 16 APPRECIATION OF FACTS ON THE PART OF THE LD. CIT(A) IN THIS REGARD. THEREFORE, IN THE INTEREST OF JUSTICE, WE F IND IT APPROPRIATE TO SEND THIS ISSUE BACK TO THE FILE OF THE LD. CIT(A) TO RE-ADJUDICATE THE SAME AFTER GIVING ADEQUATE OPP ORTUNITY OF HEARING TO THE ASSESSEE AND AFTER TAKING INTO CONSI DERATION CORRECT FACTS. LD. CIT(A) SHALL CONSIDER ALL THE J UDGMENTS, IF ANY, PLACED BY THE ASSESSEE, BEFORE HIM AND ANY OTH ER, AVAILABLE WITH LD. CIT(A), BEFORE PASSING OF THE A PPELLATE ORDER. THE LD. CIT(A) SHALL TAKE APPROPRIATE VIEW K EEPING IN VIEW ALL THE FACTS AND CIRCUMSTANCES OF THE CASE. T HUS, GROUND NO.3 OF ASSESSEES APPEAL AND GROUND NO.1 OF REVENU ES APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 4. GROUND NO.4 OF THE ASSESSEES APPEAL DEALS WITH THE ACTION OF LD. CIT(A) IN UPHOLDING THE ACTION OF LD. AO IN DISALLOWING BAD DEBTS WRITTEN OFF AMOUNTING TO RS.8 1,69,611/. THE AO HAS DEALT WITH THIS ISSUE AT PAGE 14 TO 18 O F THE ASSESSMENT ORDER. 4.1. THE BRIEF FACTS ARE THAT THE ASSESSEE CLAIMED WRITE OFF OF AMOUNT OF RS.81,69,611/- BEING THE AMOUNT OF DUES F ROM VARIOUS PARTIES TOWARDS NON-RECEIPT OF TDS CERTIFIC ATES. THE AO DISALLOWED THE SAID AMOUNT BY OBSERVING AS UNDER: FROM THE ABOVE SUBMISSIONS, IT IS CLEAR THAT THE A SSESSEE HAS RECEIVED THE ENTIRE AMOUNT OF INTEREST FROM THE RESPECTIVE PARTIES. WHILE PAYING THE INTEREST TO TH E ASSESSEE COMPANY THE RESPECTIVE PARTIES HAVE DEDUCTED TAX UN DER VARIOUS SECTIONS OF IT ACT. AS PER THE STATUTE THIS AMOUNT WHICH IS WITHHELD IS NOTHING BUT PAYMENT OF TAX ON BEHALF OF THE ASSESSEE COMPANY AND ASSESSEE COMPANY WOULD HAV E PAID ITS TAX LIABILITY AFTER DEDUCTING THIS AMOUNT. IN OTHER ICICI SECURITIES PRIMARY D. LTD 17 WORDS THIS AMOUNT IS SIMILAR TO PAYMENT OF ADVANCE TAX OR SELF ASSESSMENT TAX. IT IS A KNOWN FACT THAT THE PA YMENT OF INCOME TAX IN ANY FORM I.E. BY WAY OF ADVANCE-TAX, OR SELF ASSESSMENT OR TDS IS ONLY APPROPRIATION OF INCOME A ND IS NOT ALLOWABLE AS A DEDUCTIBLE EXPENSE. HENCE THE WR ITING OFF OF THESE AMOUNTS AS BAD DEBTS BY THE ASSESSEE CANNO T BE ALLOWED. THE FACT (THAT ASSESSEE COULD NOT RECEIVE TDS CERTIFICATES FROM VARIOUS PARTIES AND HENCE COULD N OT CLAIM THE CREDIT FOR PAYMENT OF TAX IN RESPECT OF SAME, D OES NOT ALTER THE PARADIGM AS DISCUSSED ABOVE. THE ASSESSEE COULD HAVE GONE FOR VARIOUS REMEDIES AVAILABLE IN THE LAW FOR CLAIMING CREDIT IN RESPECT OF LOSS/NON-RECEIPT OF T DS CERTIFICATES. HOWEVER, THE ASSESSEE HAS NOT AVAILED THE LEGAL REMEDIES AVAILABLE IN THE ACT IN RESPECT OF ITS CLA IM FOR TDS. HOWEVER, BY NO STRETCH OF IMAGINATION, THE NON-AVAI LABILITY OF THE TDS CERTIFICATES CAN BE CLAIMED AS A BAD DEB T AND HENCE THE ALLOWABILITY OF THE CLAIM OF CORRESPONDIN G DEDUCTION FROM THE TAXABLE INCOME CANNOT BE ENTERTA INED. HENCE THE CLAIM OF ASSESSEE FOR WRITING OFF OF RS.81,69,611/- AS BAD DEBTS, BEING AMOUNT OF TDS DEDUCTED BY VARIOUS PARTIES AND THE NON SUBMISSION OF THE CERTIFICATE TO ASSESSEE, IS HEREBY DISALLOWED. 4.2. BEING AGGRIEVED, THE ASSESSEE CONTESTED THIS M ATTER BEFORE LD. CIT(A). THE LD. CIT(A) DID NOT GIVE RELIEF AND CONFIRMED THE DISALLOWANCE BY HOLDING AS UNDER: I HAVE LOOKED INTO THE FACTS OF THE CASE. THE ALLO WABILITY OF BAD DEBTS IS CLEARLY GOVERNED BY THE PROVISIONS OF SEC. 36(I)(VII) OF THE ACT. IT IS NECESSARY FOR THE AMOU NT IN QUESTION TO FALL IN THE CATEGORY OF DEBT, BEFORE IT CAN BE C ONSIDERED FOR ALLOWABILITY U/S. 36(1)(VII). THE AMOUNT INCLUDED I N THE TDS CERTIFICATES WERE NOT IN THE NATURE OF DEBT TO THE APPELLANT AND THEREFORE ACCORDING TO ME THE AO WAS FULLY JUST IFIED IN REJECTING THE APPELLANT'S CLAIM. 4.3. BEFORE US, THE LD. COUNSEL HAS CONTESTED THIS DISALLOWANCE AND SUBMITTED THAT BAD DEBTS CLAIMED BY THE ASSESSEE COMPANY IS ON ACCOUNT OF THE AMOUNTS WHICH HAVE BEEN INCLUDED AS PART OF THE INCOME, BY NOT RECOVE RED OR ICICI SECURITIES PRIMARY D. LTD 18 RECEIVED BY THE ASSESSEE COMPANY. IT WAS FURTHER AR GUED BY HIM, AS ALTERNATIVE CLAIM, THAT IN ANY CASE DEDUCTI ON FOR THIS AMOUNT WAS TO BE ALLOWED U/S 37(1) OF THE INCOME TA X ACT, AS NORMAL BUSINESS LOSS/EXPENSES. IN SUPPORT OF THIS P ROPOSITION, RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE PUNJ AB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. SHREYANS INDUSTRIES LTD. 303 ITR 393. ON THE OTHER HAND, LD. DR HAS REL IED UPON THE ORDERS OF AUTHORITIES BELOW. 4.4. WE HAVE HEARD BOTH THE PARTIES AND AGREE, IN PRINCIPLE, WITH THE ARGUMENTS OF LD. COUNSEL. IT IS HELD THAT THE ASSESSEE IS ELIGIBLE FOR THE CLAIM OF DEDUCTION, BO TH U/S 36(1)(VII) AS WELL AS U/S 37(1) OF THE INCOME TAX A CT, 1961. THE ONLY CONSTRAINT BEFORE US IS THAT THERE IS NO CLEAR FINDING, OF EITHER OF THE LOWER AUTHORITIES, WITH REGARDS TO TH E FACTS THAT WHETHER ANY CREDIT FOR THE TDS WAS CLAIMED AND GRAN TED TO THE ASSESSEE IN THE IMPUGNED YEAR OR IN THE SUBSEQUENT YEARS PERTAINING TO THOSE TDS CERTIFICATES FOR WHICH IMP UGNED AMOUNT OF BAD DEBTS IS BEING CLAIMED. THEREFORE, WE SEND THIS ISSUE BACK TO THE FILE OF THE AO FOR THE LIMITED PU RPOSE OF VERIFICATION OF THE FACT WHETHER ANY CLAIM HAS BEEN GRANTED TO THE ASSESSEE IN THIS YEAR OR IN ANY SUBSEQUENT YEAR WITH RESPECT TO THESE TDS CERTIFICATES. IF CLAIM OF ASSE SSEE THAT NO CREDIT HAS BEEN GRANTED TO THE ASSESSEE, FOR WANT O F THESE TDS CERTIFICATES, IS FOUND TO BE FACTUALLY CORRECT, THE N THE AMOUNT OF BAD DEBTS CLAIMED BY THE ASSESSEE SHALL BE ALLOW ED AS DEDUCTION. WE DIRECT ACCORDINGLY. GROUND NO.4 OF TH E ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOS ES. ICICI SECURITIES PRIMARY D. LTD 19 5. GROUND NO.5 OF THE ASSESSEES APPEAL: IN THIS GROUND, THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A ) IN BRINGING TO TAX THE INTEREST ON DEEP DISCOUNT BONDS AMOUNTING TO RS.84,50,164/- ON THE GROUND THAT AFORESAID AMO UNT OF INTEREST HAD ACCRUED TO THE ASSESSEE COMPANY AND S INCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING, AFORESAID INTEREST INCOME WAS LIABLE TO BE INCLUDED IN ITS TAXABLE INCOME OF THE YEAR UNDER CONSIDERATION. 5.1. THE AO HAS DISCUSSED THIS ISSUE AT PAGE 18 PAR A 4 OF THE ASSESSMENT ORDER. THE RELEVANT PARA OF THE AO IS RE PRODUCED BELOW: THE ASSESSEE HAS CLAIMED THAT A SUM OF RS.84,50,16 4/- BEING INCOME ACCRUED ON VARIOUS DISCOUNTED INSTRUME NTS IS NOT TAXABLE INCOME OF THE ASSESSEE FOR THE YEAR. HO WEVER, AS PER CIRCULAR NO.225/45/96-ITA.II DATED 12.3.1996 , THE ACCRUED INCOME BECOMES INTEREST INCOME OF THE ASSES SEE DURING THE RELEVANT PERIOD. HOWEVER, SINCE THE ASSE SSEE IS DEALING IN, PURCHASE AND SALE OF BONDS IT CAN CLAIM PROFIT/LOSS AS TRADING PROFIT OR LOSS IN THE YEAR O F ACTUAL SALE (IF SOLD PRIOR TO ACTUAL REDEMPTION - AS CLAIMED BY THE ASSESSEE). HENCE A SUM OF RS. 84,5O,164/- BEING ACC RUED INCOME ON DISCOUNTED INSTRUMENTS IS ADDED AS INTERE ST INCOME OF THE ASSESSEE. 5.2. BEFORE THE LD. CIT(A), THE ASSESSEE COMPANY CO NTESTED THIS ISSUE BY SUBMITTING THAT AS PER CLARIFICATION GIVEN BY CENTRAL BOARD OF DIRECT TAXES VIDE CIRCULAR NO.225/ 45/96-ITA DATED 12.03.1996, IT HAS BEEN CLARIFIED THAT DIFFER ENCE BETWEEN THE ISSUE PRICE AND THE REDEMPTION PRICE WAS TO BE TREATED AS INTEREST INCOME IN THE YEAR OF REDEMPTION AND IF T HE INSTRUMENT WAS SOLD BEFORE THE DATE OF REDEMPTION, THEN THE ICICI SECURITIES PRIMARY D. LTD 20 DIFFERENCE BETWEEN THE SALE PRICE AND ITS COST WAS TO BE TAXED IN THE YEAR OF SALE. IT WAS FURTHER SUBMITTED BEFORE THE LD. CIT(A) THAT IF THE INTENTION WAS TO TAX THE INCOME ON ACCRUAL BASIS, THEN CAPITAL GAIN WOULD HAVE BEEN CALCULATED AS DIFFERENCE BETWEEN THE SALE PRICE AND THE COST PLUS THE INTEREST OFFERED TO TAX AND NOT THE DIFFERENCE BETWEEN THE S ALE PRICE AND COST. ATTENTION WAS DRAWN TO THE CBDT CIRCULAR NO. 2/2002 DATED 15.2.2002. HOWEVER, THE LD. CIT(A) DID NOT AG REE WITH THE SUBMISSIONS OF THE ASSESSEE AND UPHELD THE ADDI TION MADE BY THE AO, INTER ALIA ON THE GROUND THAT SITUATION OF THE ASSESSEE WAS NOT ENVISAGED IN THE CIRCULAR AND THER EFORE, IT WAS NOT COVERED BY THIS CIRCULAR AND THEREFORE, ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING, INTEREST INCOME WA S LIABLE TO BE TAXED IN THE YEAR UNDER CONSIDERATION, AND THERE FORE THE AO WAS JUSTIFIED IN MAKING ADDITION, AND SAME WAS RI GHTLY UPHELD BY THE LD. CIT(A). 5.3. BEFORE US, LD. COUNSEL OF THE ASSESSEE MADE D ETAILED SUBMISSIONS AND REITERATED THE SUBMISSIONS MADE BEF ORE THE LD. CIT(A). OUR ATTENTION WAS ALSO DRAWN ON THE AFO RESAID CIRCULAR OF THE BOARD DATED 12.03.1996 AVAILABLE AT PAGE NO.34 OF THE PAPER BOOK. RELEVANT PORTION OF THE CIRCULA R IS REPRODUCED HEREIN BELOW FOR READY REFERENCE: IT IS CLARIFIED THAT THE DIFFERENCE BETWEEN THE IS SUE AND THE REDEMPTION PRICE OF DEEP DISCOUNT BONDS WILL BE TRE ATED AS INTEREST INCOME ASSESSABLE UNDER THE INCOME TAX AC T. ON TRANSFER OF BONDS BEFORE MATURITY, THE DIFFERENCE B ETWEEN THE SALE CONSIDERATION AND ISSUE PRICE WILL BE TREA TED AS CAPITAL GAINS/LOSS IF THE ASSESSEE PURCHASED THEM B Y WAY OF INVESTMENT. HOWEVER, IN THE CASE OF AN ASSESSEE WHO ICICI SECURITIES PRIMARY D. LTD 21 DEALS IN PURCHASE AND SALE OF BONDS, SECURITIES, ET C., THE PROFIT OR LOSS SHALL BE TREATED AS TRADING PROFIT O R LOSS. 5.4. CONSIDERATION OF FACTUAL ASPECTS AND PERUSAL O F ABOVE, WOULD CLEARLY SHOW THAT THE BOARD HAS ENVISAGED THA T ON TRANSFER OF BONDS BEFORE THE MATURITY, THE DIFFEREN CE BETWEEN THE SALE CONSIDERATION AND ISSUE PRICE WILL BE TREATED AS CAPITAL GAIN/LOSS OR PROFIT/LOSS, DEPEND ING UPON THE NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE. IT WOULD BE POSSIBLE AND RATIONAL TO GIVE EFFECT TO THIS CIR CULAR, IF NO AMOUNT OF INCOME ON ACCOUNT OF INTEREST IS BROUGHT TO TAX ON ACCRUAL BASIS, ON YEAR TO YEAR BASIS. IF THE INT ERPRETATION ADOPTED BY THE LOWER AUTHORITIES IS IMPLEMENTED, TH AT WILL AMOUNT TO RENDERING THE AFORESAID CIRCULAR OF THE B OARD AS REDUNDANT AND UNWORKABLE. WE FIND THAT INTERPRETATI ON IS PLAIN AND SIMPLE. AVOIDABLE CONFUSION HAS BEEN CRE ATED BY THE LOWER AUTHORITIES. EVEN OTHERWISE, IT IS NOTED THAT THE ASSESSEES INCOME FALL IN HIGHER TAX BRACKETS AND G OOD AMOUNT OF TAXES ARE BEING PAID BY ASSESSEE EVERY YE AR. UNDER THESE CIRCUMSTANCES, THE REVENUE IS NOT GOING TO SUFFER WITH THE AMOUNT OF TAX, WHETHER THE INTEREST INCOME IS TAXED IN THE IMPUGNED YEAR OR IN THE NEXT YEAR, SO LONG AS, RETURN HAS BEEN FILED BY THE ASSESSE SHOWING T AXABLE INCOME AND TAXES HAVE BEEN PAID THEREON, IN BOTH TH E YEARS. IN OUR CONSIDERED OPINION, LIBERAL APPROACH SHOULD BE ADOPTED BY THE REVENUE AND UNNECESSARY LITIGATIO N SHOULD BE AVOIDED. WE DERIVE SUPPORT FROM THE JUDGM ENT OF HONBLE SUPREME COURT IN THE CASE OF EXCEL INDUSTRI ES LTD. 358 ITR 295. IT IS FURTHER NOTED BY US THAT THE ASS ESSEE HAS ICICI SECURITIES PRIMARY D. LTD 22 ALREADY BEEN TAXED ON THIS INCOME IN THE YEAR OF SA LE OF BONDS. THUS, AS ON DATE, THE ASSESSEE IS SUFFERING WITH THE AMOUNT OF DOUBLE ADDITION ON THE SAME INCOME. IN OU R VIEW, SUCH KIND OF SITUATION SHOULD HAVE BEEN AVOIDED, AS FAR AS POSSIBLE. KEEPING IN VIEW THESE FACTS AND CIRCUMSTA NCES OF THE CASE, WE DELETE THE ADDITION OF RS.84,50,164/- MADE UNDER THIS HEAD BY THE AO AND ACCORDINGLY GROUND NO .5 OF THE ASSESSEES APPEAL IS ALLOWED. 6. GROUND NO.4 OF REVENUES APPEAL AND GROUND NO.6 OF ASSESSEES APPEAL DEAL WITH THE DISALLOWANCE MADE BY THE AO AND PARTLY CONFIRMED BY THE LD. CIT(A), OUT OF EXPENSES INCURRED BY THE ASSESSEE AND CLAIMED AS DEDUCTION U/S 36(1)(XI) OF THE ACT 1961 FOR MAKING COMPUTER SYSTEMS OF THE ASSESSEE AS Y2K COMPLIANT. 6.1. THE BRIEF FACTS OF THE CASE ARE THAT AN AGGREG ATE SUM OF RS.63,90,000/- WAS INCURRED BY THE ASSESSEE DURING THE YEAR AS Y2K EXPENSES AND CLAIMED THIS AMOUNT AS DEDUCTION U/S 36(1)(XI). THE AO WAS NOT SATISFIED W ITH THE CLAIM OF THE ASSESSEE AND DISALLOWED THE SAME BY MA KING THE DETAILED DISCUSSION IN PARA 5 OF THE ASSESSMENT ORDER. THE MAIN REASON FOR DISALLOWANCE GIVEN BY THE AO WA S THAT AS PER LAW, THE ASSESSEE WAS OBLIGED TO FURNISH THE AUDITORS REPORT IN FORM NO.3BA, WHICH WAS NOT ENCLOSED BY TH E ASSESSEE WITH THE RETURN OF INCOME FILED BY THE ASS ESSEE. HOWEVER, AFTER RAISING OF QUERY BY THE AO REGARDING CLAIM OF Y2K EXPENSES, THE ASSESSEE HAD FILED THE AUDIT REPO RT IN ICICI SECURITIES PRIMARY D. LTD 23 FORM NO.3BA DATED 29.01.2003 BEFORE THE AO DURING COURSE OF ASSESSMENT PROCEEDINGS, BUT THE AO WAS NO T SATISFIED ON THE GROUND THAT THE SAID AUDIT REPORT SHOULD HAVE BEEN FILED ALONG WITH RETURN OF INCOME, AND FI LING OF THE AUDITORS REPORT DURING THE COURSE OF ASSESSMENT PROCEEDINGS IS NOT EQUIVALENT TO MAKING MANDATORY COMPLIANCE OF THE STATUTORY REQUIREMENTS OF SECTION 36(1)(XI). ACCORDINGLY THE DISALLOWANCE WAS MADE B Y THE AO IN THE ASSESSMENT ORDER. 6.2. BEFORE THE LD. CIT(A), THE ASSESSEE CONTESTED THIS MATTER AND SUBMITTED IN DETAIL THAT DUE COMPLIANCE HAS BEEN MADE BY THE ASSESSEE AS PRESCRIBED BY LAW AND THAT AO WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF THE LEGITIMATE CLAIM OF THE ASSESSEE. RELIANCE WAS PLAC ED BY THE ASSESSEE ON THE DECISIONS OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF CIT V. SHIVANAND ELECTRONICS , [1994] 209 ITR 63 AND OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT-VS- MAGNUM EXPORT (PVT.) LTD. [262 ITR 10] (CALCUTTA). THE LD. CIT(A) WAS SATISFIED WITH THE LEGAL ARGUMENTS OF TH E ASSESSEE COMPANY AND RELYING UPON THE AFORESAID JUDGMENTS, IT WAS HELD BY HIM THAT BY FILING OF AUD IT REPORT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE HAS MADE COMPLIANCE OF LAW AND ACCORDINGLY IT WAS H ELD BY HIM THAT, IN PRINCIPLE, THE ASSESSEE WAS ENTITLED F OR CLAIM OF DEDUCTION U/S 36(1)(XI). BUT ON FURTHER ANALYSIS, THE LD. CIT(A) FOUND THAT OUT OF AGGREGATE SUM OF RS.63,90, 000/- AN AMOUNT OF RS. 8,80,000/- PERTAINS TO PRIOR PERIO D AND ICICI SECURITIES PRIMARY D. LTD 24 ACCORDINGLY DISALLOWANCE TO THE EXTENT OF RS. 8,80, 000/- WAS CONFIRMED AND THE BALANCE AMOUNT OF DISALLOWANC E WAS DELETED. 6.3. THE ASSESSEE HAS FILED AN APPEAL BEFORE THE TR IBUNAL WITH RESPECT TO THE DISALLOWANCE OF RS.8,80,000/-, AS SUSTAINED BY THE LD. CIT(A) AND THE REVENUE HAS FIL ED APPEAL WITH RESPECT TO THE BALANCE AMOUNT OF DISALL OWANCE, AS DELETED BY THE LD. CIT(A). DURING THE COURSE OF HEARING, LD. COUNSEL OF THE ASSESSEE HAS ARGUED THIS ISSUE I N DETAIL. IT WAS ARGUED BY HIM THAT LD. CIT(A) HAS RIGHTLY H ELD THAT REQUIREMENT OF FILING OF AUDIT REPORT SHOULD BE INT ERPRETED IN LIBERAL MANNER AND FURTHER SUBMITTED THAT THERE WAS NO PRIOR PERIOD EXPENSES AND THE IMPUGNED EXPENSES WER E INCURRED DURING THE YEAR AND LD. CIT(A) HAS WRONGLY CONFIRMED THE DISALLOWANCE OF RS.8,80,000/-. ON THE OTHER HAND, LD. DR SUBMITTED THAT THE AO WAS JUSTIFIED IN DENYING THE CLAIM IN TOTO AND THE ORDER OF AO SHOUL D BE RESTORED AND FULL CLAIM SHOULD BE REJECTED. 6.4. WE HAVE HEARD BOTH THE SIDES, AND FIND THAT LD. CI T(A) WAS CORRECT AND JUSTIFIED IN FOLLOWING THE JUDGMENT S OF HONBLE BOMBAY HIGH COURT AND HONBLE CALCUTTA HIGH COURT, AS MENTIONED ABOVE, TO HOLD THAT REQUIREMENT OF FILING OF AUDIT REPORT ALONG WITH RETURN OF INCOME IS DIRECTORY AND THE SAME IS NOT MANDATORY IN NATURE AND THEREFO RE IT SHOULD BE INTERPRETED LIBERALLY. ICICI SECURITIES PRIMARY D. LTD 25 6.5. WE FEEL THAT THE REVENUE SHOULD AVOID HIGHLY T ECHNICAL APPROACH IN SUCH CASES. IF LEGISLATURE HAS BROUGHT BENEFICIAL PROVISIONS ON THE STATUTE, THEN, THERE SHOULD BE AN ENDEAVOR TO ENSURE THAT THE ASSESSE IS ABLE TO RIGH TFULLY CLAIM THE BENEFITS OF THE BENEFICIAL PROVISIONS. IN OUR CONSIDERED VIEW, SINCE THE CLAIM HAS BEEN FOUND GEN UINE AND THE AUDIT REPORT WAS FILED BY THE ASSESSEE, DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS AND THE SAME WAS EXAMINED BY AO IN WHICH NOTHING WRONG, HAS BEEN FOU ND, THUS, THE ASSESSEE WOULD BE ENTITLED FOR THE BENEFI TS OF THE CLAIM AND LD. CIT(A) IS JUSTIFIED IN GRANTING RELIE F TO THE ASSESSEE IN THIS REGARD. WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS GROUND AND ACCORDINGLY GROUND NO.4 OF REVEN UES APPEAL IS DISMISSED. SO FAR AS, GROUND RAISED BY THE ASSESSEE WITH RESPE CT TO DISALLOWANCE OF RS.8,80,000/- IS CONCERNED, MADE BY THE AO ON THE GROUND OF PRIOR PERIOD EXPENSES, WE HAVE SEEN BILLS OF EXPENSES WITH THE ASSISTANCE OF LD. COUNSE L. IT IS NOTED BY US THAT PAPER BOOK PAGES NO.44 AND 48 ARE THE BILLS WITH RESPECT TO IMPUGNED EXPENDITURE. IT IS S EEN FROM THE BILLS THAT, IN THE PRECEDING YEAR, IMPUGNED AMO UNT WAS PAID BY THE ASSESSEE ON ACCOUNT OF ADVANCE FOR AN O NGOING PROJECT. THE FINAL AMOUNT WAS PAYABLE ON IMPLEMENTA TION OR ON DELIVERY OF THE PRODUCT. THE UNDISPUTED FACT IS THAT IMPLEMENTATION/EXECUTION/DELIVERY OF THE WORK/ PROJ ECT WAS DONE DURING THE YEAR UNDER CONSIDERATION. THUS, THE EXPENSES GOT CRYSTALLISED DURING THIS YEAR. THEREFO RE, THESE EXPENSES, PERTAIN TO THE YEAR UNDER CONSIDERATION, AND ICICI SECURITIES PRIMARY D. LTD 26 HAVE BEEN INCURRED DURING THE YEAR. IN OUR VIEW, TH ESE EXPENSES SHOULD NOT HAVE BEEN DISALLOWED, THEREFOR E DISALLOWANCE OF RS.8,80,000/- IS DIRECTED TO BE DEL ETED AND CONSEQUENTLY GROUND NO.6 OF ASSESSEES APPEAL IS AL LOWED. 7. GROUNDS NO. 2 & 3 OF REVENUES APPEAL :- IN THESE GROUNDS, THE REVENUE HAS CHALLENGED THE ACTION OF L D. CIT(A) IN DELETING THE DISALLOWANCE OF BAD DEBTS TO RS.5,69, 69,000/- ON ACCOUNT OF WRITING OFF OF NON-CONVERTIBLE DEBENTURE S OF M/S. NUCENT FINANCE LTD. AND IN DELETING THE ADDITION MA DE BY THE AO ON ACCOUNT OF INTEREST ACCRUED ON DEBENTURES OF M/S. NUCENT FINANCE LTD. 7.1. THE AO HAS DISCUSSED THIS ISSUE AT PARA NO.2 T O 4 OF THE ASSESSMENT ORDER. IT WAS OBSERVED BY THE AO THAT TH E ASSESSEE HAS CLAIMED BAD DEBTS FOR AN AGGREGATE AMOUNT OF RS.6,67,22,070/- BEING THE AMOUNT OF NON-CONVERTIBL E DEBENTURES ISSUED BY M/S. NUCENT FINANCE LTD. AMOUN TING TO RS.5,69,69,000/- AND INTEREST RECEIVABLE THEREON FO R RS.79,75,660/-. ACCORDING TO THE AO, THESE DEBENTUR ES COULD NOT HAVE BEEN WRITTEN OFF AS BAD DEBTS, SINCE THE A SSESSEE COMPANY WAS ABLE TO RECOVER A SUM OF RS.2,00,03,887 /- ON ACCOUNT OF INTEREST RECEIVABLE, IN THE SUBSEQUENT Y EAR. ACCORDING TO THE AO, UNDER SUCH CIRCUMSTANCES, ASSE SSEES CLAIM FOR TREATING THE AFORESAID AMOUNT AS BAD DEBT S COULD NOT HAVE BEEN ALLOWED. THE ASSESSEE GAVE ITS REPLY, BUT AO WAS NOT SATISFIED AND THEREFORE AFORESAID AMOUNT OF BAD DEB TS WAS DISALLOWED IN THE ASSESSMENT ORDER. ICICI SECURITIES PRIMARY D. LTD 27 7.2. BEING AGGRIEVED, THE ASSESSEE CONTESTED THIS M ATTER BEFORE THE LD. CIT(A). HE HAS DISCUSSED THIS ISSUE AT PAGE 10 TO 11 OF THE APPELLATE ORDER. BEFORE HIM, THE ASSESSEE COMPA NY MADE DETAILED SUBMISSIONS AND THESE SUBMISSIONS ARE FOUN D TO BE RELEVANT BY US AND THEREFORE THESE ARE REPRODUCED HERE UNDER: 3.2 IT HAS BEEN SUBMITTED IN APPEAL BEFORE ME THAT THE APPELLANT IS A NON BANKING FINANCE COMPANY GOVERNED BY THE GUIDELINE BY RBI, ACCORDING TO WHICH WHEN THE COMPA NY DEFAULTS EITHER IN THE PAYMENT OF INTEREST ON DUE D ATE OR REPAYMENT OF PRINCIPAL ON MATURITY, IT TURNS INTO A NPA. THE APPELLANT'S REPRESENTATIVE PRODUCED BEFORE ME THE CORRESPONDENCE WHICH WERE ALSO SUBMITTED BEFORE THE AO TO SHOW THAT M/S. NUCENT FINANCE LTD., WAS FACING FINA NCIAL PROBLEMS AND WAS NOT IN A POSITION TO REPAY THE AMO UNT. ACCORDINGLY, IT WAS DECIDED TO WRITE OFF THE AMOUNT OF RS. 5,69,69,0001- IN THE BOOKS OF ACCOUNTS. MY ATTENTIO N WAS DRAWN TO THE PROVISIONS OF SEC. 36(1)(VII) WHICH CL EARLY LAY DOWN THAT FOR THE PURPOSE OF CLAIMING DEDUCTION OF BAD DEBTS, IT IS A SUFFICIENT COMPLIANCE IF THE AMOUNT IS ACTUALL Y WRITTEN OFF IN THE BOOKS. IT IS NOT NECESSARY FOR THE APPELLANT TO ESTABLISH THAT THE DEBTS HAS BECOME BAD. MERELY BECAUSE PART OF TH E DEBT WAS RECOVERED SUBSEQUENTLY; DOES NOT MEAN THAT THE DEBT HAS NOT BECOME BAD. IT WAS POINTED OUT THAT THE AMOUNT SUBSEQUENTLY RECOVERED HAS BEEN OFFERED TO TAX. THE LD. REPRESENTATIVE FOR' THE APPELLANT DREW SUPPORT FROM THE DECISION OF HON'BLE ITAT, MUMBAI IN THE CASE REPORT ED AT 86 ITD 193(TM), WHEREIN, IT WAS HELD THAT IT IS NOT OB LIGATORY FOR THE ASSESSEE TO PLACE DEMONSTRATIVE PROOF FOR ESTAB LISHING THE DEBT AS BAD AND IF HE HAS TAKEN STEPS TO WRITE OFF IN THE PREVIOUS YEAR, IT IS A SUFFICIENT COMPLIANCE FOR CL AIMING, DEBT AS BAD DEBT. SUPPORT HAS ALSO BEEN DRAWN FROM THE DECI SION REPORTED AT 152 CTR 119 (GUJ) AND THE DECISION OF H ON'B LE ITAT, CALCUTTA, REPORTED AT 153 ITD 3 13. AFTER CAREFULLY ANALYSING THE SUBMISSIONS OF THE AS SESSEE, THE LD. CIT(A) DECIDED THIS ISSUE IN FAVOUR OF THE ASSE SEE AND DELETED THE DISALLOWANCE MADE BY THE AO, KEEPING IN VIEW THE ICICI SECURITIES PRIMARY D. LTD 28 FACTS OF THE CASE AND JUDGMENTS RELIED UPON BY THE ASSESSEE. NOW, REVENUE HAS BROUGHT THIS ISSUE BEFORE THE TRIB UNAL. 7.3. BEFORE US, LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSEE HAS SUBMITTED THAT NOW THIS ISSUE IS SETTL ED BY HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. V. CIT 323 ITR 397 (SC), WHEREIN IT HAS BEEN HELD BY THE HONBLE APEX COURT THAT THE ASSESSEE NEED NOT PROVE THAT DEBTS H AS BECOME BAD AND MERE WRITE OFF IN THE BOOKS OF ACCOUNTS IS SUFFICIENT. IT HAS BEEN FURTHER SUBMITTED BY LD. COUNSEL THAT I N THE SUBSEQUENT YEAR, WHENEVER THE AMOUNT HAS BEEN RECOV ERED, THE SAME HAS BEEN INCLUDED IN ITS INCOME BY THE ASS ESSEE COMPANY AND HAS BEEN ACCEPTED BY THE REVENUE AS SUC H. AS A RESULT, THE ASSESSEE HAS BEEN MADE TO SUFFER DOUBLE TAXATION WITH RESPECT TO THE INTEREST WRITTEN OFF AS BAD DEB TS. THE LD. COUNSEL HAS SUBMITTED THAT AS PER LAW, ONLY REAL IN COME IS TO BE ASSESSED TO TAX AND IN SUPPORT OF THIS PROPOSITI ON, LD. CIT(A) HAD RELIED UPON TWO JUDGMENTS OF HONBLE SUP REME COURT IN THE CASE OF CIT V. BOKARO STEEL LIMITED 236 ITR 315 (SC) & GODHRA ELECTRICITY CO. LTD. V. CIT (1997) 225 ITR 746(SC). ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDER O F AO AND SUBMITTED THAT SINCE THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE IMPUGNED AMOUNT HAD BECOME BAD DEBT DURI NG THE YEAR AND THEREFORE, THE AO HAD RIGHTLY DISALLOWED T HE CLAIM AND THEREFORE, THE ORDER OF THE AO SHOULD BE RESTOR ED AND ORDER OF LD. CIT(A) SHOULD BE REVERSED. ICICI SECURITIES PRIMARY D. LTD 29 7.4.. WE HAVE CONSIDERED BOTH THE SIDES AND HAVE GONE THROUGH MATERIAL BEFORE US. FIRST OF ALL, IT IS SEE N BY US THAT AMENDMENT WAS MADE IN SECTION 36(1)(VII) VIDE DIREC T TAX LAWS (AMENDMENT) ACT 1987 W.E.F. 01.04.1989. AMENDE D PROVISION READS AS UNDER : .SUBJECT TO THE PROVISIONS OF SUB-SECTION(2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF A S IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR T HE PREVIOUS YEAR FOR THE SAKE OF READY REFERENCE, RELEVANT PORTION O F PRE- AMENDED SECTION IS ALSO REPRODUCED HEREIN; ..ANY DEBTS, OR PART THEREOF, WHICH IS ESTABLISHED TO HAVE BECOME BAD DEBTS IN THE PREVIOUS YEAR. THE PERUSAL OF THESE TWO SETS OF PROVISIONS, WOULD SHOW THAT EARLIER (I.E. BEFORE 01.04.1989), THE REQUIREMENT O F THE LAW WAS THAT THE ASSESSEE WAS OBLIGED UNDER THE LAW TO EST ABLISH THAT THE IMPUGNED AMOUNT OF DEBT HAD BECOME BAD AND O NLY THEREAFTER THE ASSESSEE COULD HAVE CLAIMED THE SAME AS BAD DEBTS IN ITS PROFIT AND LOSS ACCOUNT. THUS, ESTABLI SHMENT OF THE AMOUNT AS BAD DEBT WAS A MANDATORY CONDITION TO C LAIM A DEDUCTION UNDER THIS ACT. SUCH A REQUIREMENT OF LAW LED TO ENORMOUS LITIGATION. WITH A VIEW TO AVOID THIS LITI GATION AND HARDSHIPS TO THE ASSESSEE, THE PROVISION IN THIS RE GARD WAS SIMPLIFIED AND NOW IN THE POST AMENDED LAW, THE ONL Y REQUIREMENT IS THAT THE IMPUGNED AMOUNT IS TO BE WR ITTEN OFF AS BAD DEBT IN THE BOOKS OF ACCOUNT OF THE ASSESSEE COMPANY AND TO BE DEBITED ACCORDINGLY IN THE PROFIT AND LOS S ACCOUNT OF THE ASSESSEE. THUS, IN OTHER WORDS, IN THE AMENDED LAW THERE ICICI SECURITIES PRIMARY D. LTD 30 IS NO REQUIREMENT OF PROVING THE IMPUGNED AMOUNT OF DEBT AS BAD. FURTHER, IT HAS BEEN ALSO BEEN PROVIDED UND ER THE LAW THAT SUBSEQUENTLY IF ANY RECOVERY IS MADE OUT OF TH E AMOUNTS CLAIMED AS BAD DEBT, THEN THE SAME WOULD BE INCLUDE D IN THE INCOME OF THE ASSESSEE IN THE YEAR IN WHICH RECOVER Y IS MADE. THUS, THE LAW IS NOW PLAIN AND SIMPLE. IT HAS BEEN SO CLARIFIED IN THIS VERY MANNER BY HONBLE SUPREME COURT ALSO I N THE CASE OF T.R.F. LTD. (SUPRA) . IT IS FURTHER NOTED BY US THAT NO DOUBTS, WHATSOVER, HAVE BEEN EXPRESSED BY THE AO ON THE GEN UINENESS OF THE CLAIM OR ABOUT THE NATURE OF THE CLAIM. THE OBJECTION RAISED BY THE AO IN THE ASSESSMENT ORDER IS NOT SUS TAINABLE UNDER THE LAW AND THEREFORE, THE LD. CIT(A) HAS RIG HTLY DELETED THE ADDITION MADE BY THE AO. SIMILARLY WITH REGARD TO INTEREST ALSO, WHEN THE PRINCIPLE AMOUNT ITSELF IS ALLOWABLE AS BAD DEBT, THEN INTEREST AMOUNT WOULD ALSO BE ALLOWABLE AND AC CORDINGLY WE HOLD THAT LD. CIT(A) HAS RIGHTLY DELETED THE DIS ALLOWANCE MADE BY THE AO. CONSEQUENTLY, WE HOLD THAT GROUNDS NO. 2 & 3 OF THE APPEAL OF THE REVENUE ARE DISMISSED. AS A RESULT THEREOF, APPEAL OF THE REVENUE IS DISMI SSED AND APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. REVENUES APPEAL FOR ASSESSMENT YEAR 2001-02 IN ITA NO.5309/MUM/2006: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS),-III M UMBAI DATED 14.08.2006, PASSED AGAINST THE PENALTY ORDER U/S 271(1)(C) FOR THE ASSESSMENT YEAR 2001-02. ICICI SECURITIES PRIMARY D. LTD 31 8. IN THIS CASE, THE PENALTY ORDER U/S 271(1)(C) WAS PASSED BY THE AO, LEVYING PENALTY AMOUNTING TO RS.1,34,7 4,826/- @ 200% OF TAX SOUGHT TO BE EVADED. 8.1. IT IS NOTED THAT PENALTY WAS LEVIED ON THE FOL LOWING AMOUNT OF DISALLOWANCES MADE BY THE AO IN THE ASSESSMENT O RDER: (I) BAD DEBTS WRITTEN OFF RS.81,61,611/- (II) INCOME ACCRUED ON DISCOUNTED INSTRUMENT RS.84,50,164/- (III) Y2K EXPENSES RS.63,90,000/- 8.2. THE ASSESSEE CONTESTED PENALTY ORDER BEFORE TH E LD. CIT (A), WHEREINPENALTY WAS DELETED APPEAL OF THE ASSE SSEE WAS ALLOWED. THEREAFTER, REVENUE FILED THE APPEAL AGAIN ST THE ORDER OF LD. CIT(A) DELETING THE PENALTY. 8.3. DURING THE COURSE OF HEARING BEFORE US, LD. DR HAS RELIED UPON THE PENALTY ORDER, WHEREAS LD. COUNSEL HAS REL IED UPON THE ORDER OF LD. CIT(A). 8.4. BEFORE GOING INTO THE MERITS OF THE PENALTY OR DER, IT IS NOTED BY US THAT OUT OF THE DISALLOWANCES MENTIONED IN PARA 8.1. ABOVE, WE HAVE DELETED THE DISALLOWANCES ON AC COUNT OF INTEREST ON DEEP DISCOUNT BONDS AND SOFTWARE EXPENS ES. THEREFORE, WITH RESPECT THESE TWO DISALLOWANCES, TH E BASIS OF LEVY OF PENALTY CEASE TO EXIST AND THEREFORE, CONSE QUENTLY, PENALTY ALSO CANNOT SURVIVE AND ACCORDINGLY WE UPHO LD THE ORDER OF LD. CIT(A) IN DELETING THE PENALTY ON BOTH THESE ISSUES. ICICI SECURITIES PRIMARY D. LTD 32 WITH RESPECT TO THE REMAINING DISALLOWANCE, WITH R EGARD TO BAD DEBTS OF RS.81,61,611/-, IT IS NOTED THAT THIS AMOUNT REPRESENTED DUES FROM VARIOUS PARTIES TOWARDS NON-R ECEIPT OF TDS CERTIFICATES. THIS ISSUE HAS BEEN SENT BACK BY US TO THE FILE OF THE AO FOR RE-DECIDING THE SAME. THEREFORE, AS ON DATE, THIS ADDITION DOES NOT SURVIVE. CONSEQUENTLY, THE P ENALTY ORDER ON THIS ADDITION IS ALSO SET ASIDE. THE AO SHALL BE AT LIBERTY TO INITIATE THE PENALTY PROCEEDINGS, IF CONSIDERED APP ROPRIATE, AFTER THIS ISSUE IS RE-DECIDED BY THE AO, AS PER LA W. 8.5. AS A RESULT THEREOF, PENALTY APPEAL OF THE REV ENUE IS PARTLY ALLOWED. ASSESSEES APPEAL IN ITA NO.4152/MUM/2005 & REVENUE S APPEAL IN ITA NO.4103/MUM/2005 FOR, ASSESSMENT YEAR 2001-02:- THESE CROSS APPEALS WERE FILED BY THE REVENUE AND A SSESSEE AGAINST THE ORDER OF LD. CIT(A) DATED 29.03.2005 FO R THE ASSESSMENT YEAR 2001-02. 9. GROUND NO.1 OF ASSESSEES APPEAL : THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN CONFIRMING T HE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF INTEREST AMOUNTING TO RS.1,61,23,300/-. 9.1. THIS GROUND IS IDENTICAL TO THE GROUND NO.1 OF ASSESSEES APPEAL FOR A.Y. 2000-01 IN ITA NO.4325/MUM/2004,(SU PRA). WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSE E AND HELD THAT NO DISALLOWANCE WAS CALLED FOR, OUT OF INTERES T EXPENSES ICICI SECURITIES PRIMARY D. LTD 33 U/S 14A. WHILE DECIDING APPEAL FOR 2001-02, THE LD. CIT(A) HAS FOLLOWED THE ORDER OF A.Y.2000-01 OF ITS PREDEC ESSOR AND CONFIRMED THE DISALLOWANCE. IT IS NOTED BY US THAT FACTS ARE IDENTICAL IN THIS YEAR AS WELL AND THEREFORE, FOLLO WING OUR OWN ORDER FOR A.Y. 2000-01 IN ITA NO.4325/MUM/2004, GRO UND NO.1 OF THE ASSESSEES APPEAL FOR A.Y. 2001-02 IS A LLOWED IN FAVOUR OF THE ASSESSEE AND CONSEQUENTLY DISALLOWANC E OUT OF INTEREST, MADE BY THE AO U/S 14A OF RS.1,61,23,300/ -, IS DIRECTED TO BE DELETED. 10 . IN GROUND NO.2 OF THE ASSESSEES APPEAL , THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDIN G THE ACTION OF LD. AO IN MAKING DISALLOWANCE OF SUM OF RS.7,00, 000/- U/S 14A OF THE ACT BEING 3.5% OF BROKERAGE AND STAMP DU TY AND CUSTODIAL SERVICES. 10.1. IN THE YEAR UNDER CONSIDERATION THE LD. CIT(A ) HAS UPHELD THE DISALLOWANCE FOLLOWING ITS ORDER FOR A.Y . 2000-01. 10.2. WE HAVE DECIDED THIS GROUND IN APPEAL OF THE ASSESSEE FOR A.Y. 2000-01 WHEREIN IT WAS RAISED AS GROUND NO .2. THE FACTS AND CIRCUMSTANCES IN THIS YEAR ARE ALSO IDENT ICAL. THUS, FOLLOWING OUR OWN ORDER, WE DIRECT THAT THE DISALLO WANCE OF RS. 7,00,000/- IS CONFIRMED AND GROUND NO.2 OF ASSESSEE S APPEAL FOR A.Y. 2001-02 IS REJECTED. 11. GROUND NO.3 OF ASSESSEES APPEAL AND GROUND NO. 1 OF REVENUES APPEAL ARE COMMON, WHEREIN THE ASSESSEE HAS ICICI SECURITIES PRIMARY D. LTD 34 CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING TH E ACTION OF AO IN DISALLOWING A SUM OF RS.44,79,910/- BEING 1% OF THE INDIRECT EXPENDITURE U/S 14A OF THE ACT. ON THE OTH ER HAND, THE REVENUE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN DELETING THE DISALLOWANCE OF RS.21,966,900/- OUT OF THE DISA LLOWANCE MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTIO N 14A. 11.1. IT IS NOTED THAT LD. CIT(A) HAS FOLLOWED THE ORDER OF EARLIER YEARS WHILE GIVING PART RELIEF TO THE ASSES SEE UNDER THIS HEAD. WE HAVE DECIDED THESE GROUNDS IN A.Y. 2000-01 WHEREIN THIS ISSUE HAS BEEN SENT BACK TO THE FILE OF LD. CI T(A) FOR RE- ADJUDICATING THIS ISSUE AFTER CONSIDERING PROPER FA CTS. THEREFORE, FOLLOWING OUR OWN ORDER IN THIS YEAR ALS O BOTH THESE GROUNDS ARE SENT BACK TO THE FILE OF LD. CIT(A) FOR REEXAMINATION AND RE-ADJUDICATION IN TERMS OF OUR D IRECTION AS CONTAINED IN OUR ORDER FOR A.Y. 2000-01. WE DIRECT ACCORDINGLY. 11.2. IN THE RESULT, GROUND NO.3 OF ASSESSEES APPE AL AND GROUND NO.1 OF REVENUES APPEAL ARE ALLOWED FOR STA TISTICAL PURPOSES. 12. IN GROUND NO.4 OF ASSESSEES APPEAL , THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING TH E ACTION OF THE AO IN BRINGING TO TAX THE INTEREST ON DEEP DISC OUNT BONDS AMOUNTING TO RS.1,20,91,990/-. 12.1. IT IS NOTED BY US THAT SIMILAR ISSUE HAS ALRE ADY BEEN DECIDED BY US IN ASSESSEES APPEAL IN A.Y. 2000-0 1, AS ICICI SECURITIES PRIMARY D. LTD 35 GROUND NO.5, WHEREIN THIS ADDITION HAS BEEN DELETED . THE LD. CIT(A) HAS FOLLOWED THE ORDER FOR A.Y. 2000-01 TO U PHOLD THE ADDITION MADE BY THE AO. THUS, WE FIND THAT ADMITTE DLY FACTS ARE IDENTICAL IN THIS YEAR AS WELL. THUS, FOLLOWING OUR OWN ORDER, WE HOLD THAT THE ADDITION MADE BY AO IS NOT SUSTAINABLE IN LAW AND THEREFORE, THE SAME IS DIRECTED TO BE DE LETED. CONSEQUENTLY, GROUND NO.4 OF ASSESSEES APPEAL IS A LLOWED. 13. IN GROUND NO.5 OF ASSESSEEES APPEAL ; THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN INVOKING PRO VISIONS OF SECTION 94(7) OF THE ACT AND MAKING AN ADDITION OF RS.1,33,55,778/-. 13.1. IT IS SEEN THAT NO ADDITION WAS MADE BY THE A O IN THE ASSESSMENT ORDER IN THIS REGARD. LD. CIT(A) FOR FIR ST TIME DURING THE COURSE OF APPELLATE PROCEEDINGS, FOUND T HAT OUT OF THE TOTAL DIVIDEND INCOME AMOUNTING TO RS.2.22 CROR ES, DIVIDEND FOR AN AMOUNT OF RS.1,66,76,805/- PERTAINE D TO THE PURCHASE/SALE OF UNITS OF VARIOUS MUTUAL FUNDS. THE DETAILS OF THESE TRANSACTIONS HAVE BEEN REPRODUCED BY THE LD. CIT(A) IN APPELLATE ORDER AT PAGE NO.11 AND 12. THE LD. CIT( A) FURTHER OBSERVED THAT THE ASSESSEE COMPANY HAD INCURRED A L OSS OF RS.1,33,55,788/- WHICH WAS NETTED OF AGAINST THE PR OFITS OF THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) FURTHER OB SERVED THAT NO NOTE TO THIS EFFECT WAS GIVEN IN THE NOTES TO TH E ACCOUNTS AND IT HAD BEEN NETTED OFF LIKE ANY OTHER BUSINESS TRANSACTION. IT WAS FURTHER NOTED BY THE CIT(A) THAT IMPORTANT F EATURES OF THESE TRANSACTIONS WERE THAT IN ALL THESE CASES UNI TS WERE ICICI SECURITIES PRIMARY D. LTD 36 PURCHASED OVER A PERIOD OF 8-10 DAYS AND IN SOME CA SES, OVER A PERIOD OF TWO WEEKS AND THEN THESE WERE SOLD. LD CIT(A) DISALLOWED THE LOSS BY INVOKING THE PROVISIONS OF SECTION 94(7) AND HELD AS UNDER: 9.24 NOW COMING TO THE FACT IN THE PRESENT CASE, I T WILL BE SEEN THAT APPELLANT WAS IN FULL KNOWLEDGE THAT SUBS EQUENT TO THE DIVIDEND BEING DECLARED AND CREDITED IN HIS ACCOUNT, THE NAV WOULD BE CORRESPONDINGLY REDUCED AND THEREF ORE, THE REDEMPTION PROCEEDS ON THE DATE OF RE-INVESTMEN T OF THE DIVIDEND WOULD BE LESS I.E. THE LOS ARISING FROM TH E TRANSACTION WAS KNOWN WITH CERTAINTY TO THE APPELLA NT. 9.25 I HAVE CONSIDERED THE FACTS OF THE CASE AND I HAVE ALSO GONE THROUGH THE SUBMISSION MADE BY THE APPELLANT. IN THE INSTANT CASE, THE APPELLANT WAS FULLY AWARE OF THE FACTS AND SUBSEQUENT TO THE DIVIDEND BEING DECLARED AND CREDI TED IN HIS ACCOUNT, THE NAV WOULD BE CORRESPONDINGLY REDUC ED AND THEREFORE, REDEMPTION PROCEEDS ON THE DATE OF REINV ESTMENT OF THE DIVIDEND WOULD BE LOSS. IN VIEW OF THE FACTS AND CASE LAWS DISCUSSED EARLIER, I HOLD THAT THIS LOSS CANNO T BE ALLOWED AS BUSINESS LOSS AND THEREFORE, THE SAME IS DISALLOWED AND THE INCOME OF THE APPELLANT IS ENHAN CED TO THE EXTENT OF RS.1,33,55,778/-.. 13.2. BEFORE US, LD. COUNSEL ASSAILED THE ORDER OF LD. CIT(A) AND ARGUED THAT LD. CIT(A) HAS WRONGLY APPLIED PROVISIONS OF SECTION 94(7) AND DISALLOWANCE MADE BY HIM IS CONTR ARY TO LAW AND FACTS. THE LD. COUNSEL ALSO PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF WA LFORT SHARE AND STOCK BROKERS (P) LTD, 326 ITR 1 (SC), AND SUBMITTED THAT THE ISSUE NOW STANDS COVERED WITH TH E JUDGMENT OF HONBLE SUPREME COURT AND SECTION 94(7) WAS NOT APPLICABLE DURING THE YEAR UNDER CONSIDERATION AND THEREFORE, THE LOSS HAS BEEN WRONGLY DISALLOWED AND THE ACTION OF LD. CIT(A) SHOULD BE REVERSED. ON THE OTHER HAND, LD. D R ICICI SECURITIES PRIMARY D. LTD 37 SUPPORTED THE ORDER OF LD. CIT(A) ON THIS ISSUE. HO WEVER, ON OUR SPECIFIC QUERY TO LD. DR WITH RESPECT TO THE OR DER OF HONBLE SUPREME COURT IN THE CASE OF WALFORT SHARE AND STOCK BROKERS (P) LTD. (SUPRA), LD. DR HAD NOTHING TO SUB MIT. 13.3. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES. WE FIND THAT THIS ISSUE STANDS C OVERED WITH THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE O F WALFORT SHARE AND STOCK BROKERS (P) LTD. (SUPRA). THE RELEV ANT PORTION OF THE JUDGMENT AS RELIED UPON BY THE LD. COUNSEL I S REPRODUCED HEREUNDER: IMPACT OF SECTION 94(7) THE NEXT POINT WHICH AROSE FOR DETERMINATION WAS WH ETHER THE LOSS PERTAINING TO EXEMPT INCOME WAS DEDUCTIBLE A GAINST THE CHARGEABLE INCOME. THE REAL OBJECTION OF THE DEPART MENT APPEARED TO BE THAT THE ASSESSEE WAS GETTING TAX-FR EE DIVIDEND AND AT THE SAME TIME, IT WAS CLAIMING LOSS ON THE S ALE OF THE UNITS; AND THAT THE ASSESSEE HAD PURPOSELY AND IN A PLANNED MANNER ENTERED INTO A PRE-MEDITATED TRANSACTION OF BUYING AND SELLING UNITS YIELDING EXEMPT DIVIDENDS WITH FULL K NOWLEDGE ABOUT THE FALL IN THE NAV AFTER THE RECORD DATE AND THE PAYMENT OF TAX-FREE DIVIDEND AND, THEREFORE, LOSS ON SALE W AS NOT GENUINE. THERE WAS NO MERIT IN THE ARGUMENTS OF THE DEPARTMENT. THE LEAD MATTER COVERED ASSESSMENT YEAR S BEFORE INSERTION OF SECTION 94(7) VIDE THE FINANCE ACT, 20 01 WITH EFFECT FROM 1-4-2002. WITH REGARD TO SUCH CASES, IT WAS ES TABLISHED THAT THERE WAS A SALE AND THE SALE PRICE WAS RECE IVED BY THE ASSESSEE, AND THAT THE ASSESSEE DID RECEIVE DIVIDEN D. THE FACT THAT THE DIVIDEND RECEIVED WAS TAX-FREE WAS THE POS ITION RECOGNIZED UNDER SECTION 10(33). THE ASSESSEE HAD M ADE USE OF THE SAID PROVISION OF THE ACT. SUCH USE CANNOT B E CALLED ASABUSE OF LAW. EVEN ASSUMING THAT THE TRANSACTIO N WAS PRE- PLANNED, THERE WAS NOTHING TO IMPEACH THE GENUINENE SS OF THE TRANSACTION. WITH REGARD TO THE RULING IN MCDOWELL & CO. LTD. V. CTO [1985] 154 ITR 148 /22 TAXMAN 11 (SC), IT MAY BE STATED THAT IN THE LATER DECISION OF THE SUPREME COURT IN UNION OF INDIA V. AZADI BACHAO ANDOLAN [2003] 263 ITR 706 / 132 TAXMAN 373 IT HAS BEEN HELD THAT A CITIZEN IS FREE TO CARRY O N ITS ICICI SECURITIES PRIMARY D. LTD 38 BUSINESS WITHIN THE FOUR CORNERS OF THE LAW. THAT, MERE TAX PLANNING, WITHOUT ANY MOTIVE TO EVADE TAXES THROUGH COLOURABLE DEVICES, IS NOT FROWNED UPON EVEN BY THE JUDGMENT O F THE SUPREME COURT IN MCDOWELL & CO. LTD.S CASE (SUPRA) . HENCE, IN THE CASES ARISING BEFORE 1-4-2002, LOSSES PERTAININ G TO EXEMPTED INCOME COULD NOT BE DISALLOWED. HOWEVER, A FTER 1-4- 2002, SUCH LOSSES TO THE EXTENT OF DIVIDEND RECEIVE D BY THE ASSESSEE COULD BE IGNORED BY THE ASSESSING OFFICER IN VIEW OF SECTION 94(7). THE OBJECT OF SECTION 94(7) IS TO CU RB THE SHORT- TERM LOSSES. APPLYING SECTION 94(7) IN A CASE FOR T HE ASSESSMENT YEAR(S) FALLING AFTER 1-4-2002, THE LOSS TO BE IGNORED WOULD BE ONLY TO THE EXTENT OF THE DIVIDEND RECEIVED AND NOT THE ENTIRE LOSS. IN OTHER WORDS, LOSSES OVE R AND ABOVE THE AMOUNT OF THE DIVIDEND RECEIVED WOULD STILL BE ALLOWED FROM WHICH IT FOLLOWS THAT THE PARLIAMENT HAS NOT TREATE D THE DIVIDEND STRIPPING TRANSACTION AS SHAM OR BOGUS. IT HAS NOT TREATED THE ENTIRE LOSS AS FICTITIOUS OR ONLY A FIS CAL LOSS. AFTER 1- 4-2002, LOSSES OVER AND ABOVE THE DIVIDEND RECEIVED WILL NOT BE IGNORED UNDER SECTION 94(7). IF THE ARGUMENT OF THE DEPARTMENT WAS TO BE ACCEPTED, IT WOULD MEAN THAT BEFORE 1-4-2 002, THE ENTIRE LOSS WOULD BE DISALLOWED AS NOT GENUINE BUT, AFTER 1-4- 2002, A PART OF IT WOULD BE ALLOWABLE UNDER SECTION 94(7) WHICH CANNOT BE THE OBJECT OF SECTION 94(7) WHICH IS INSE RTED TO CURB TAX AVOIDANCE BY CERTAIN TYPES OF TRANSACTIONS IN S ECURITIES. THERE IS ONE MORE WAY OF ANSWERING THIS POINT. SECT IONS 14A AND 94(7) WERE SIMULTANEOUSLY INSERTED BY THE SAME FINANCE ACT, 2001. SECTION 14A WAS INSERTED WITH EFFECT FRO M 1-4-1962 WHEREAS SECTION 94(7) WAS INSERTED WITH EFFECT FROM 1-4-2002. THE REASON IS OBVIOUS, THE PARLIAMENT REALIZED THAT SEVERAL PUBLIC SECTOR UNDERTAKINGS AND PUBLIC SECTOR ENTERP RISES HAD INVESTED HUGE AMOUNTS OVER LAST COUPLE OF YEARS IN THE IMPUGNED DIVIDEND STRIPPING TRANSACTIONS SO ALSO DE CLARATION OF DIVIDENDS BY MUTUAL FUND ARE BEING VETTED AND REGUL ATED BY THE SEBI FOR LAST COUPLE OF YEARS. IF SECTION 94(7) WOULD HAVE BEEN BROUGHT INTO EFFECT FROM 1-4-1962, AS IN THE C ASE OF SECTION 14A, IT WOULD HAVE RESULTED IN REVERSAL OF LARGE NU MBER OF TRANSACTIONS. THIS COULD BE ONE REASON WHY THE PARL IAMENT INTENDED TO GIVE EFFECT TO SECTION 94(7) ONLY WITH EFFECT FROM 1-4- 2002. HOWEVER, THIS LAST REASONING HAS NOTHING TO D O WITH THE INTERPRETATIONS GIVEN TO SECTIONS 14A AND 94(7). [P ARAS 19 AND 20] RECONCILIATION OF SECTIONS 14 AND 94(7) THE NEXT QUESTION WAS ABOUT RECONCILIATION OF SECTI ONS 14A AND 94(7). THE TWO OPERATE IN DIFFERENT FIELDS. SECTION 14A DEALS WITH DISALLOWANCE OF EXPENDITURE INCURRED IN EARNIN G TAX-FREE ICICI SECURITIES PRIMARY D. LTD 39 INCOME AGAINST THE PROFITS OF THE ACCOUNTING YEAR U NDER SECTIONS 30 TO 37. ON THE OTHER HAND, SECTION 94(7) REFERS TO DISALLOWANCE OF THE LOSS ON THE ACQUISITION OF AN A SSET WHICH SITUATION IS NOT THERE IN CASES FALLING UNDER SECTI ON 14A. UNDER SECTION 94(7), THE DIVIDEND GOES TO REDUCE THE LOSS . IT APPLIES TO CASES WHERE THE LOSS IS MORE THAN THE DIVIDEND. SEC TION 14A APPLIES TO CASES WHERE THE ASSESSEE INCURS EXPENDIT URE TO EARN TAX FREE INCOME BUT WHERE THERE IS NO ACQUISITION O F AN ASSET. IN CASES FALLING UNDER SECTION 94(7), THERE IS ACQUISI TION OF AN ASSET AND EXISTENCE OF THE LOSS WHICH ARISES AT A P OINT OF TIME SUBSEQUENT TO THE PURCHASE OF UNITS AND RECEIPT OF EXEMPT INCOME. IT OCCURS ONLY WHEN THE SALE TAKES PLACE. S ECTION 14A COMES IN WHEN THERE IS CLAIM FOR DEDUCTION OF AN EX PENDITURE WHEREAS SECTION 94(7) COMES IN WHEN THERE IS CLAIM FOR ALLOWANCE FOR THE BUSINESS LOSS. ONE MUST KEEP IN M IND THE CONCEPTUAL DIFFERENCE BETWEEN LOSS, EXPENDITURE, CO ST OF ACQUISITION, ETC., WHILE INTERPRETING THE SCHEME OF THE ACT. [PARA 21] 13.4. ON THE PERUSAL OF AFORESAID JUDGMENT, IT IS C LEAR THAT THE SECTION 94(7) IS NOT RETROSPECTIVE AND THEREFORE, I T CANNOT BE INVOKED IN THE YEAR UNDER CONSIDERATION. FURTHER, H ONBLE SUPREME COURT HAS OBSERVED THAT IN ABSENCE OF SECTI ON 94(7), THE TRANSACTIONS DONE BY THE ASSESSEE IN THIS REGAR D WERE PERMITTED UNDER THE INCOME TAX LAW AND THUS LOSSE S RESULTING THERE FROM COULD NOT HAVE BEEN DISALLOWED. THUS, RE SPECTFULLY FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT, WE FIND THAT LD. CIT(A) HAS WRONGLY DISALLOWED THE LOSS. THUS, R EVERSING THE ACTION OF LD. CIT(A), WE DIRECT THE AO TO ALLOW THE LOSS OF RS.1,33,55,778/-. AS A RESULT, GROUND NO.5 OF THE A SSESSEES APPEAL IS ALLOWED. 14. GROUND NO.2 OF REVENUES APPEAL:- IN THIS GROUND THE REVENUE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN DELETING THE ICICI SECURITIES PRIMARY D. LTD 40 ADDITION OF RS.1,85,14,205/- MADE BY THE AO ON ACCO UNT OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE. 14.1. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PA RA 2 OF THE ASSESSMENT ORDER, WHEREAS LD. CIT(A) HAS DISCUSSED THIS ISSUE IN PARA 5 TO 5.4. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE COMPANY HAS WRITT EN OFF BAD DEBTS AGGREGATING SUM OF RS.1,85,14,205/-. THIS AMOUNT REPRESENTED DUES FROM VARIOUS PARTIES TOWARDS NON-R ECEIPT OF ITS FEES. THE AO HAS DISALLOWED THE CLAIM OF THE AS SESSEE FOR THE REASONS SUMMARIZED IN THE ASSESSMENT ORDER AT P AGE 12, AS REPRODUCED HEREUNDER: 1. THE ASSESSEE COULD NOT FURNISH STEPS TAKEN BY IT TO RECOVER ITS DUES FROM THESE PARTIES. 2. THE NAMES OF VARIOUS PARTIES CITED ABOVE HAVE NEVE R APPEARED AS DEFAULTER ANYWHERE. 3. HAD ASSESSEE TAKEN APPROPRIATE LEGAL ACTION AGAINST THESE PARTIES, BY NO STRETCH OF IMAGINATION, IT CAN BE SA ID THAT THESE PARTIES WOULD NOT HAVE PAID THEIR DUES. IN NUTSHELL, THE AO HELD THAT THE ASSESSEE FAILED T O ESTABLISH JUSTIFICATION OF ITS WRITE OFF OF THE DEBTS. AS PER AO FOR MAKING CLAIM, IT WAS NECESSARY FOR THE ASSESSEE TO ESTABLI SH THAT THE ASSESSEE HAS UTILIZED ALL SOURCES OF MEANS AVAILABL E TO IT TO RECOVER ITS DUES AND ITS DEBTS CANNOT BE SIMPLY ALL OWED BECAUSE IT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACC OUNTS. THUS, CLAIM OF THE ASSESSEE WAS REJECTED. 14.2. THIS ISSUE WAS CONTESTED BY THE ASSESSEE BEFO RE THE LD. CIT(A). THE LD. CIT(A), RELYING UPON THE ORDER OF A SSESSMENT ICICI SECURITIES PRIMARY D. LTD 41 YEAR 2000-01 IN THE ASSESSEES OWN CASE, HELD THAT THE ASSESSEE COMPANY WAS WELL WITHIN ITS RIGHTS TO CLAI M THE AFORESAID AMOUNT AS BAD DEBTS AND ACCORDINGLY THIS DISALLOWANCE WAS DELETED. 14.3. BEFORE US, LD. COUNSEL OF THE ASSESSEE COMPAN Y HAS SUBMITTED THAT NOW THIS ISSUE HAS BEEN SETTLED BY H ONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. V. CIT (20 10) 323 ITR 397 (SC) WHEREIN IT HAS BEEN HELD BY THE HONBLE AP EX COURT THAT ASSESSEE NEED NOT ESTABLISH THAT DEBTS HAS BEC OME BAD AND THE CLAIM WOULD BE ALLOWABLE IF DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNTS. ON THE OTHE R HAND, LD. DR HAS RELIED UPON THE ORDER BY THE AO. 14.4. WE HAVE HEARD BOTH THE SIDES. WE HAVE ALREADY PASSED A DETAILED ORDER ON THIS ISSUE FOR A.Y. 2000 -01 IN THE EARLIER PART OF THIS ORDER AND IN VIEW OF JUDGMENT OF HONBLE SUPREME COURT AND OUR OWN ORDER FOR A.Y. 2000-01, W E UPHOLD THE ORDER OF LD. CIT(A) ON THIS ISSUE AND CO NFIRM THE DELETION OF THE DISALLOWANCE. CONSEQUENTLY, GROUND NO.2 OF REVENUES APPEAL IS DISMISSED. 14.5. IN THE RESULT, APPEALS FILED BY THE REVENUE A S WELL AS ASSESSEE ARE PARTLY ALLOWED. ASSESSEES APPEAL IN ITA NO.884/MUM/2007 AND REVENUES APPEAL IN ITA NO.928/MUM/2007 FOR ASSESSMENT YEAR 2002-03: ICICI SECURITIES PRIMARY D. LTD 42 THESE CROSS APPEALS FILED BY THE REVENUE AND ASSESS EE ARE AGAINST THE ORDER OF LD. CIT(A) DATED 16.11.2006 FO R THE ASSESSMENT YEAR 2002-03: 15. GROUND NO.1 & 2 OF ASSESSEES APPEAL AND GROUND NO. 1 OF REVENUES APPEAL: IN THESE GROUNDS, THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN CONFIRMING T HE DISALLOWANCE OF INTEREST AMOUNTING TO RS.59,40,000/ - AND RS.4,03,00,000/- MADE BY THE AO, WHEREAS THE REVEN UE HAS CHALLENGED THE RELIEF PROVIDED BY THE LD. CIT(A) OF RS.7,44,10,000/-, OUT OF TOTAL DISALLOWANCE OF RS.11,47,10,000/- MADE BY THE AO IN THE ASSESSMENT ORDER. 15.1. THE AO HAS DISCUSSED THIS ISSUE AT PARA 2.1 T O 2.3, AND PARA 3 OF THE ASSESSMENT ORDER, WHEREIN DISALLOWANC E OF INTEREST HAS BEEN MADE, ON THE GROUND THAT BORROWED FUNDS WERE USED BY THE ASSESSEE COMPANY FOR MAKING INVEST MENT IN SHARES OF SUBSIDIARY COMPANIES AND FOR TAX FREE SEC URITIES. 15.2. THE LD. CIT(A) HAS DISCUSSED THESE ISSUES IN PARA 2 TO 2.3 AND PARA 3 OF THE APPELLATE ORDER, WHEREIN DISA LLOWANCE MADE BY THE AO HAS BEEN PARTLY CONFIRMED, FOLLOW ING THE APPEAL ORDERS OF PRECEDING ASSESSMENT YEARS IN ASSE SSEES OWN CASE FOR ASSESSMENT YEARS 2000-01 & 2001-02. 15.3. BEFORE US, THE LD. COUNSEL HAS RELIED UPON HI S SUBMISSIONS MADE IN A.Y. 2000-01 AND 2001-02 AND A LSO DREW OUR ATTENTION TOWARDS THE FACTS AND FIGURES AS CONTAINED ICICI SECURITIES PRIMARY D. LTD 43 IN THE WORKING SHEET SUBMITTED BY HIM TO IMPRESS UP ON THE POINT THAT OWN FUNDS WERE FAR IN EXCESS OF INVESTME NT MADE IN THESE SECURITIES. IN ADDITION TO THE ABOVE, LD. COU NSEL ALSO DREW OUR ATTENTION UPON THE JUDGMENT OF HONBLE SUP REME COURT IN THE CASE OF SA BUILDERS VS. CIT 288 ITR 1 (SC). ON THE OTHER HAND, THE LD. DR RELIED UPON THE ORDERS OF LD . CIT(A) AND THE AO. 15.4 WE HAVE HEARD BOTH THE SIDES. IT IS SEEN BY US THA T FACTS IN THE PRECEDING YEARS ARE IDENTICAL. IN ADDITION T O THE ABOVE, IT IS FURTHER OBSERVED THAT HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LTD.,SUPRA, HAD OBSERVED THAT EVEN IF E XPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCU RRED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY. THUS KEEPING IN V IEW THE AFORESAID FACTUAL POSITION AND CLEAR POSITION OF LA W AND FOLLOWING THE ORDER OF ASSESSMENT YEARS 2000-01 AND 2001-02, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY DISALLOWANCE OF INTEREST OF RS.59,40,000/- IS DIREC TED TO BE DELETED. THUS, TOTAL DISALLOWANCE OF RS.11,47,10,00 0/- MADE BY THE AO IS ALSO DELETED AND CONSEQUENTLY GROUNDS NO.1 AND 2 OF THE ASSESSEES APPEAL ARE ALLOWED. 16. GROUND NO.3 OF ASSESSEES APPEAL AND GROUND NO.2 OF REVENUES APPEAL : IN THESE GROUNDS THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING TH E ACTION OF THE AO OF DISALLOWING BROKERAGE, STAMP DUTY AND CUS TODIAL CHARGES U/S 14A OF THE ACT TO THE EXTENT OF RS.1,57 ,665/-, ICICI SECURITIES PRIMARY D. LTD 44 WHEREAS THE REVENUE HAS CHALLENGED THE ACTION OF LD . CIT(A) IN REDUCING THE DISALLOWANCE FROM RS.62,90,000/- TO RS.1,57,665/-. THE AO HAS DISCUSSED THIS ISSUE AT P ARA 3 OF THE ASSESSMENT ORDER WHEREAS THE LD. CIT(A) HAS DIS CUSSED THIS ISSUE AT PARA 4 TO 4.3 OF THE APPELLATE ORDER. 16.1. THE LD. COUNSEL HAS RELIED UPON HIS SUBMISSIO NS MADE IN THE PRECEEDINGS ASSESSMENT YEARS AND LD. DR HAS RELIED UPON THE ORDER OF THE AO ON THIS ISSUE. ON PERUSAL OF RECORD AND CONSIDERATION OF ARGUMENTS ADVANCED FROM BOTH S IDES, WE NOTE THAT THIS ISSUE HAS ALREADY BEEN DECIDED BY US IN PROCEEDINGS YEARS. IT IS SEEN THAT DISALLOWANCE WAS MADE BY AO WAS ON THE SIMILAR PATTERN AS IN EARLIER YEARS A ND LD. CIT(A) HAS GIVEN MAJOR RELIEF TO THE ASSESSEE AND S USTAINED DISALLOWANCE OF A SMALL AMOUNT, FOLLOWING THE SAME PATTERN AS IN EARLIER YEARS. THUS, FOLLOWING OUR ORDER OF A.Y. 2000-01, WE SUSTAIN THE ORDER OF LD. CIT(A). THUS, ACTION OF LD . CIT(A) IN GIVING PART RELIEF IS CONFIRMED. CONSEQUENTLY, GROU ND NO.3 OF ASSESSEES APPEAL AS WELL AS GROUND NO.2 OF REVENUE S APPEAL ARE DISMISSED. 17. IN GROUND NO.4 OF ASSESSEES APPEAL , THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN UPHOLDING TH E ACTION OF AO AND DISALLOWING AN AMOUNT TO THE EXTENT OF RS.2,92,91,500/- U/S 14A OF THE ACT, ON ADHOC BASIS , @ 5% OF INDIRECT EXPENSES, CONSIDERING THE SAME AS ATTRIBUT ABLE TO EARNING OF TAX FREE INCOME. ICICI SECURITIES PRIMARY D. LTD 45 17.1. THIS ISSUE HAS BEEN DISCUSSED BY THE AO IN TH E ASSESSEMENT ORDER IN PARA 3, WHEREAS LD. CIT(A) HAS DISCUSSED THIS ISSUE IN HIS ORDER IN PARAS 5 TO 5.5 . 17.2. BEFORE US, BOTH THE PARTIES HAVE RELIED UPON THE SUBMISSIONS MADE IN PRECEDING YEARS IN A.YS. 2000-0 1 & 2001-02. IN THESE YEARS, THIS ISSUE HAS BEEN SENT BACK TO THE FILE OF CIT(A), AND FOLLOWING THE SAME IN THIS YEAR ALSO, THIS ISSUE IS SENT BACK TO THE FILE OF THE CIT(A), IN TE RMS WITH THE SAME DIRECTIONS AS IN A.YS. 2000-01 & 2001-02. THUS , GROUND NO.4 OF THE ASSESSEES APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. 17.3 IN GROUND NO.5 OF THE ASSESSEES APPEAL , THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN CONFIRMI NG THE DISALLOWANCE MADE BY THE AO AMOUNTING TO RS.6,88,82 0/- ON ACCOUNT OF BAD DEBTS MADE BY THE AO ON THE GROUND T HAT THE ASSESSEE HAS NOT ESTABLISHED THAT DEBT HAS BECOME BAD. THIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASS ESSEE IN EARLIER YEARS. THUS FOLLOWING THE ORDERS OF EARLIER YEARS, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. GROUND NO 5 OF ASSESSES APPEAL IS ALLOWED. 17.4. GROUND NO.6 OF ASSESSEES APPEAL : THE ASSESSEE COMPANY IS AGGRIEVED AGAINST THE ACTION OF LD. CIT( A) IN CONFIRMING THE ACTION OF THE AO IN TREATING THE LOS S OF RS.20,77,919/- ARISING FROM THE SALE OF SHARES OF S OUTH INDIAN BANK AS SPECULATIVE LOSS, WHICH WAS CLAIMED BY TH E ASSESSEE ICICI SECURITIES PRIMARY D. LTD 46 AS BUSINESS LOSS. THE ASSESSEE IS ALSO AGGRIEVED AGAINST THE ACTION OF THE AO IN NOT ALLOWING THE LONG TERM CAPI TAL LOSS OF RS.7,74,718/- ARISING FROM THE SALE OF THE AFORESA ID SHARES. 17.5. THE FACTS OF THE CASE ARE THAT THE ASSESSEE H AD PURCHASED SHARES OF SOUTH INDIA BANK LTD. ON 16.3.1 995 @ RS. 60/- PER SHARE. THESE SHARES WERE ORIGINALLY HE LD AS INVESTMENTS AND WERE SHOWN AS SUCH IN THE BALANCE S HEET. HOWEVER, W.E.F. 01.04.1996, THE ASSESSEE CONVERTED THESE SHARES INTO STOCK IN TRADE. SOME OF THESE SHARES WE RE SOLD DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2002-2003 . THE GAIN/LOSS EQUIVALENT TO THE DIFFERENCE BETWEEN THE INDEXED PURCHASE PRICE AND THE MARKET VALUE OF THE SHARES A S ON THE DATE OF CONVERSION AMOUNTING RS.7,74,718/- WAS TREA TED BY THE ASSESSEE AS LONG TERM CAPITAL LOSS IN VIEW OF T HE PROVISIONS CONTAINED IN SECTION 45(2) OF THE I.T. ACT. AS PER THIS SECTION, SUCH PROFIT OR GAIN IS CHARGEABLE TO INCOME-TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE WAS SOLD OR OTHERWISE TRANSFERRED. THE SAID LONG TERM CAPITAL L OSS OF RS. 7,74,718/- WAS SET OFF BY THE ASSESSEE AGAINST THE SHORT TERM CAPITAL GAIN ARISING DURING THE YEAR. THE DIFFERENC E BETWEEN THE MARKET PRICE AS ON THE DATE OF CONVERSION AND THE S ALE PRICE AT RS. 20,77,719/- WAS SHOWN BY THE ASSESSEE AS LOSS U NDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS OR PROFESSION . HOWEVER, THE AO DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. AC CORDING TO HIM, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TH E SALE AND PURCHASE OF SHARES OF OTHER COMPANIES AND ITS CASE DID NOT FALL IN ANY OF THE EXCEPTIONS PROVIDED IN EXPLANATION TO SECTION 73. ICICI SECURITIES PRIMARY D. LTD 47 THEREFORE, INVOKING THE PROVISIONS CONTAINED IN EXP LANATION TO SECTION 73, THE AO TREATED THE LOSS OF RS. 20,77,71 9/- AS SPECULATION LOSS AND ALSO DID NOT ALLOW THE LONG TE RM CAPITAL LOSS, CLAIMED BY THE ASSESSEE AT RS.7,74,718/-. ACC ORDINGLY, THE SET OFF OF THE LONG TERM CAPITAL LOSS OF RS. 7, 74,718/- AGAINST THE SHORT CAPITAL GAINS, AS CLAIMED BY THE ASSESSEE, WAS NOT ALLOWED BY THE AO. 17.6. THE ASSESSEE CONTESTED THE MATTER BEFORE THE LD. CIT(A), BUT LD. CIT(A) WAS NOT SATISFIED WITH THE SUBMISSIO NS OF THE ASSESSEE AND CONFIRMED THE ACTION OF AO IN TREATING THESE LOSSES AS SPECULATIVE. 17.7. BEFORE US, LD. COUNSEL HAS RELIED UPON THE JU DGMENT OF COORDINATE BENCH OF ITAT MUMBAI IN THE CASE OF M/S. MOTHER INDIA SECURITIES PVT. LTD. (IN ITA NO.3271/MUM/201 3 A.Y. 2009-10 VIDE ORDER DATED 07.08.2015). IT WAS FURT HER SUBMITTED THAT THE SAID JUDGMENT SQUARELY COVERS TH IS ISSUE. OUR ATTENTION HAS BEEN DRAWN ON PARAS 2.1 TO 2.3 OF THE SAID ORDER AND THE SAME ARE REPRODUCED HEREUNDER: 2.1.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS, IN BRI EF, ARE THAT THE ASSESSEE IS A SHARE BROKER AND TRADER IN SHARES/INV ESTOR. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE R ECEIVED BROKERAGE OF RS.26,61,904/- AND ALSO LOSS ON AC COUNT OF TRADING IN SHARES AMOUNTING TO RS. 1,72,33,233/-, WHICH WAS TREATED AS DEEMED SPECULATION. THE ASSESS EE CARRIED FORWARD THE LOSS ON ACCOUNT OF ALLEGED SPEC ULATIVE INCOME AND RS.30,54,731/-. PURSUANT TO A NOTICE BY THE ASSESSING OFFICER, THE ASSESSEE VIDE LETTER DATED 0 5/10/2011 FILED STATEMENT OF SHORT TERM CAPITAL LOSS AND LONG TERM CAPITAL GAINS. THE REPLY OF THE ASSESSEE IS REPRODUCED HERE UNDER:- ICICI SECURITIES PRIMARY D. LTD 48 'IN THIS CONTEXT IT IS SUBMITTED THAT THE ASSESSEE DECIDED TO CARRY ON SHARE INVESTMENT ACTIVITY. WITH THAT IN TENTION THE ASSESSEE BOUT THE SHARES AND HELD THEM AS INVESTMENTS IN THE BOOKS OF ACCOUNTS. THE MEMORANDU M AND ARTICLE OF ASSOCIATION ALSO AUTHORIZE THE COMPA NY TO MAKE INVESTMENT IN THE SHARES AND SECURITIES OF OTH ER COMPANIES. YOUR HONOURS ATTENTIONS IS ALSO INVITED TO THE DEFINITION OF SHORT TERM M/S MOTHER INDIA SECURITIE S PVT. LTD. CAPITAL ASSET AS PROVIDED U/S 2(42A) OF THE IN COME TAX ACT WHICH STATES THAT IF THE SHARES ARE HELD BY AN ASSESSEE FOR NOT MORE THAN 12 MONTHS THE SAME ARE T O BE TREATED AS SHORT TERM CAPITAL ASSET AND ACCORDINGLY AS PER SECTION 2(42B) THE CAPITAL GAIN ARISING ON THE TRANSFER OF SUCH ASSET SHOULD BE TREATED AS SHORT TERM CAPIT AL GAIN.' HOWEVER, THE LD. ASSESSING OFFICER IN VIEW OF EXPLA NATION TO SECTION 73 OF THE ACT HELD THE TRANSACTION AS SPECULATIVE IN NATURE AND THE ENTIRE LONG TERM CAPITAL GAIN OF RS. 41,24,265/- AND SHORT TERM CAPITAL LOSS OF RS.30,54,731/- WERE TREATED AS SPECULATIVE INCOME AND ADJUSTED WITH THE SPECULATIV E INCOME/LOSS OF RS.1,72,33,233/-. 2.2. ON APPEAL, BEFORE THE LD. COMMISSIONER OF INCO ME TAX (APPEALS), THE SUBMISSIONS OF THE ASSESSEE WERE CON SIDERED. THE STAND OF THE ASSESSEE BEFORE THE LD. COMMISSION ER OF INCOME TAX (APPEALS) WAS THAT APPLICATION OF EXPLAN ATION TO SECTION 73 OF THE ACT IS QUITE UNJUSTIFIED AS THE PROVISION I S NOT APPLICABLE, WHERE INCOME ON SALE OF SHARES HELD AS INVESTMENT OFFERED UNDER THE HEAD CAPITAL GAIN/CAPITAL LOSS BY FURTHER CLAIMING THAT SECTION 73 IS APPLICABLE IN RESPECT OF LOSS IN SPECULATION BUSINESS. THE LD. COMMISSIONER OF INCOM E TAX (APPEALS) GRANTED RELIEF TO THE ASSESSEE. 2.3. THE REVENUE IS AGGRIEVED AND IS IN APPEAL BEFO RE THIS TRIBUNAL. WE FIND THAT THE ASSESSEE IS ADMITTEDLY E NGAGED IN THE BUSINESS OF TRADING OF SHARES AS INVESTMENT. TH E ASSESSEE EARNED LOSS OF RS.1,72,33,233/-. THE QUESTION FOR C ONSIDERATION IS WHETHER THE LONG TERM CAPITAL GAIN/SHORT TERM CA PITAL LOSS OF THE ASSESSEE ARE IN THE NATURE OF SPECULATIVE M/S M OTHER INDIA SECURITIES PVT. LTD. TRANSACTION WITHIN THE MEANING OF EXPLANATION TO SECTION 73 OF THE ACT. WE NOTE THAT EVEN THE LD. ASSESSING OFFICER HAS NOT DISPUTED THAT CERTAIN SHA RES WERE HELD AS INVESTMENT ON WHICH LTCG/STCL WAS SUFFERED BY THE ASSESSEE. BROADLY, WE ARE IN AGREEMENT THAT THE ASS ESSEE HELD THE SHARES AS INVESTMENT ON STCG BY INCURRING LOSS. THE ICICI SECURITIES PRIMARY D. LTD 49 PROVISO/EXPLANATION TO SECTION 73 APPLIES IN RESPECT OF BUSINESS OF COMPANY CONSISTING OF PURCHASE OF SHARES OF OTHE R COMPANIES. HOWEVER, THE ASSESSEE IS IN THE BUSINESS OF SALE AND PURCHASE OF SHARE BUT THE TRANSACTION IN SHARE, HELD AS INVESTMENT, GIVE RISE TO LTCG/STCL, WHICH CANNOT BE HELD TO BE BUSINESS OF THE ASSESSEE AS HAS BEEN ASSERTED BY THE REVENUE. IN SUCH A SITUATION, EVEN IF, IT IS HELD T O BE SPECULATIVE TRANSACTION, THE LOSSES EXPECTED TO BE SET OFF AGAI NST PROFIT. NO POSITIVE INCOME IS AVAILABLE FOR TAXATION FOR THE C URRENT YEAR, THEREFORE, THE PROFIT OF RS.41,24,261/- (CAPITAL GA INS) IS ADJUSTABLE AGAINST OTHER LOSSES DURING THE YEAR ITS ELF. AS PER SECTION 73(2) OF THE ACT WHERE FOR ANY ASSESSMENT YEAR, ANY LOSS IS COMPUTED IN RESPECT OF SPECULATION BUSINESS , WHICH HAS NOT BEEN WHOLLY SET OFF UNDER SUB-SECTION (1), SO M UCH OF THE LOSS IS NOT TO BE SET OFF ARE WHOLE LOSS, WHERE THE ASSESSEE HAS NO INCOME FROM ANY OTHER SPECULATION BUSINESS, SHAL L, SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER, BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEARS AND (I) IT SHALL BE SET OFF AGAINST THE PROFIT AND GAIN S, IF ANY, OF ANY SPECULATION BUSINESS CARRIED ON BY HIM ASSESSABLE F OR THAT ASSESSMENT YEAR AND M/S MOTHER INDIA SECURITIES PVT . LTD. (II) IF THE LOSS CANNOT BE WHOLLY SET OFF, THE AMOU NT OF LOSS NOT SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING A SSESSMENT YEAR AND SO ON. THUS, WE FIND NO INFIRMITY IN THE CONCLUSION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BECAUSE THERE IS NO POSITIVE INCOME AVAILABLE FOR TAXATION FOR THE CURR ENT YEAR AND EVEN IF, THESE ARE HELD TO BE SPECULATIVE TRANSACTI ONS, THE LOSS WAS REQUIRED TO BE SET OFF AGAINST THE PROFIT DURIN G THE YEAR ITSELF AS PER SUB- SECTION 1 TO SECTION 73 . HOWEVER, WE ARE IN AGREEMENT WITH THE FINDING OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT THE LTCG AND STCG WERE NOT SPECU LATIVE TRANSACTIONS. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE O RDERS OF LD. CIT(A) AND THE AO AND HAS VEHEMENTLY ARGUED THA T THESE LOSSES HAVE BEEN RIGHTLY DISALLOWED. IT WAS FURTHER SUBMITTED BY THE LD. DR THAT THE PLEADING HAS BEEN TAKEN FOR THE FIRST TIME BY THE ASSESSEE COMPANY BEFORE HONBLE TRIBUNA L. IT WAS ICICI SECURITIES PRIMARY D. LTD 50 FURTHER SUBMITTED BY LD. DR AND THAT THIS ISSUE HAS NOT BEEN EXAMINED BY THE LOWER AUTHORITIES FROM THIS ANGLE. IT HAS BEEN SUBMITTED BY THE LD. DR THAT THE LD. CIT(A) HAS REL IED UPON ANOTHER JUDGMENT OF ITAT MUMBAI BENCH IN THE CASE O F M/S. ONYX INVESTMENTS PVT. LTD. VS. ITO (ITA NO.6656/MUM /2003- A.Y. 2001-02), WHEREIN IT HAS BEEN HELD THAT EXPLAN ATION TO SECTION 73 WOULD BE ATTRACTED EVEN TO SALE AND PURC HASE OF SHARES IN THE CONTEXT OF INVESTMENT IN SHARES. 17.8.. WE HAVE HEARD BOTH THE PARTIES. IN OUR CONSIDERED OPINION, THIS ISSUE NEEDS TO GO BACK TO THE FILE OF THE AO. THE AO SHALL TAKE INTO CONSIDERATION NEW FACTUAL PLEADI NGS MADE BY THE ASSESSEE AND ALL OTHER FACTS AS WOULD BE REQ UIRED FOR DECIDING THIS ISSUE. THE ASSESSEE SHALL BE FREE TO SUBMIT FURTHER DETAILS AND EVIDENCES AS MAY BE REQUIRED BY THE AO AND AS MAY BE CONSIDERED APPROPRIATE BY THE ASSESSE E IN SUPPORT OF ITS CLAIM. THE AO SHALL TAKE INTO ACCOUN T THE JUDGMENTS OF M/S. MOTHER INDIA SECURITIES PVT. LTD. (SUPRA) AND M/S. ONYX INVESTMENTS PVT. LTD.( SUPRA) OR ANOTHER JUDGMENT AS MAY BE FOUND RELEVANT AS PER LAW AT THE TIME OF ADJ UDICATION OF THE ISSUE. THUS, THIS ISSUE IS SENT BACK TO THE FIL E OF THE AO WITH THE DIRECTIONS AS STATED ABOVE. THUS, GROUND N O.6 IS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.7 OF ASSESSEES APPEAL: THIS GROUND DEALS WITH THE ACTION OF LD. CIT(A) IN UPHOLDING THE ACT ION OF AO OF DISALLOWING EXPENDITURE ON SOFTWARE EXPENSES AMOUNT ING TO RS.39,85,423/-. THIS ISSUE HAS BEEN DISCUSSED BY TH E AO IN ICICI SECURITIES PRIMARY D. LTD 51 PARA 7 OF THE ASSESSMENT ORDER AND LD. CIT(A) HAS D ISCUSSED THIS ISSUE IN PARA 8 TO 8.2 OF THE APPELLATE ORDER. 18.1. THE AO FOUND THAT FOLLOWING EXPENSES INCURRED ON THE SOFTWARE WERE OF CAPITAL NATURE: PARTY PARTICULARS AMOUNT ICICI INFOTECH IRS PROGRAM 6,45,000 GOLDMINE SOFTWARE PURCHASE OF SOFTWARE- EQ RESEARCH 2,76,000 APTECH SYSTEM INC. PURCHASE OF GAUSS SOFTWARE 4,18,843 FINENG SOLUTIONS LTD. WEBSITE DEVELOPMENT 15,00,000 ICICI INFOTECH ORACLE LICENSE 11,45,580 IN RESPONSE TO THE QUERY OF THE LD. AO, THE ASSESSE E SUBMITTED AS UNDER: 1. ANY SOFTWARE PACKAGE IS NOT LONG LASTING AND DOES N OT RESULT IN ANY BENEFIT OF ENDURING NATURE, IN VIEW O F BETTER AND MORE EFFICIENT TECHNOLOGIES BEING DEVELO PED AND INTRODUCED CONTINUOUSLY; 2. IN THE FAST CHANGING BUSINESS TECHNIQUES, THESE EXPENSES ARE INCURRED FREQUENTLY FOR KEEPING UP WIT H CONSTANT MODERNIZATION AND HENCE THEY DO NOT FALL WITHIN THE AMBIT OF CAPITAL EXPENDITURE; 3. THE COMPUTER SOFTWARE EXPENSES ARE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS; 4. THESE EXPENSES ENABLE THE MANAGEMENT TO CARRY ON THE BUSINESS MORE EFFICIENTLY AND PROFITABLY; 5. THE LIFE CYCLE OF SUCH SOFTWARE IS COMPUTER TECHNOL OGY AND OBSOLESCENCE RATE IS ALSO HIGH; ICICI SECURITIES PRIMARY D. LTD 52 THE AO WAS NOT SATISFIED AND EXPENSES INCURRED ON T HESE SOFTWARES WERE HELD TO BE DISALLOWABLE. 18.2. BEFORE THE LD. CIT(A), THE ASSESSEE MADE DET AILED SUBMISSIONS REITERATING THE ARGUMENTS MADE BEFORE T HE AO, BUT LD. CIT(A) WAS ALSO NOT SATISFIED AND THE DISAL LOWANCE MADE BY THE AO WAS CONFIRMED. 18.3. BEFORE US, LD. COUNSEL HAS MADE DETAILED SUBM ISSIONS AND SUBMITTED THAT MODIFICATIONS IN EXISTING SOFTWA RE TO FACILITATE ASSESSEES BUSINESS ARE ALLOWABLE AS REV ENUE EXPENDITURE. RELIANCE HAS BEEN PLACED BY THE LD. CO UNSEL ON THE FOLLOWING JUDGMENT:- (I)CIT VS. RAYCHEM RPG LTD. (346 ITR 138)(BOMBAY) (II)CIT VS. AMWAY INDIA ENTERPRISES (2012) (346 ITR 342) (III) CIT VS. ASAHI INDIA SAFETY GLASS LTD. (203 TA XMAN 277) ON THE OTHER HAND, LD. DR HAS SUPPORTED THE ORDER O F AUTHORITIES BELOW AND HAS ARGUED THAT THE AO HAS RI GHTLY MADE THE DISALLOWANCE. 18.4. WE HAVE GONE THROUGH THE ORDER OF THE LD. CIT(A) AND AO. WE HAVE ALSO CONSIDERED THE SUBMISSIONS MAD E BY BOTH THE SIDES. WE HAVE OBSERVED THAT IMPUGNED SOFT WARE EXPENSES ARE ROUTINE EXPENSES WHICH ARE REQUIRED TO BE INCURRED TO ENABLE THE ASSESSEE COMPANY TO RUN DAY TO DAY ICICI SECURITIES PRIMARY D. LTD 53 BUSINESS OPERATIONS MORE EFFICIENTLY. IT IS WELL KN OWN FACT THAT TODAYS TECHNOLOGY IS CHANGING VERY FAST AND RATE O F OBSOLESCENCE IS VERY HIGH. IT HAS BEEN HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RAYCHEM, (SUPRA) T HAT THE SOFTWARE ACQUIRED BY THE ASSESSEE DID NOT FORM PART OF ITS PROFIT MAKING APPARATUS, AND THEREFORE SOFTWARE EXP ENDITURE WAS ALLOWABLE EXPENDITURE. SIMILARLY HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AMWAY INDIA ENTERPRISES (2012) ( 346 ITR 341) , IT WAS HELD THAT EXPENDITURE INCURRED ON PURCHASE OF SOFTWARE WAS ALLOWABLE AS REVENUE EXPENDITURE. FURT HER OBSERVATIONS OF DELHI HIGH COURT IN THE CASE OF ASAHI INDIA SAFETY GLASS LTD (2012) ( 346 ITR 329) ARE WORTH NOTING TO DECIDE THIS ISSUE. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE MR . FAROOKH IRANI, SUBMITTED THAT THE SOFTWARE EXPENSES ARE INC URRED FOR DAYTO-DAY RUNNING OF THE BUSINESS AND WITH THE CHA NGE OF TECHNOLOGY, THE SPAN OF SOFTWARE IS VERY SHORT WHIC H HAS TO BE CHANGED EVERY NOW AND THEN. THEREFORE, IT DOES NOT HAVE ANY ENDURING BENEFIT ON THE CAPITAL FIELD. IN SUPPORT O F HIS CONTENTION, HE HAS STRONGLY RELIED UPON THE DECISIO N OF THE HONBLE DELHI HIGH COURT IN CIT V/S ASAHI INDIA SAF ETY GLASS LTD. [2012] 346 ITR 329 (DEL.). HE FURTHER SUBMITTE D THAT THE DEPRECIATION SCHEDULE IN APPENDIXI, WHICH PROVIDES FOR RATE OF DEPRECIATION IN CASE OF COMPUTERS AND SOFTWARE WILL NOT LEAD TO AN AUTOMATIC CONCLUSION THAT ALL THE SOFTWARE EXPEN SES ARE TO BE TREATED AS CAPITAL EXPENSES FROM A.Y.2006-07. RU LES PERSE CANNOT DECIDE WHAT IS CAPITAL ASSET OR REVENUE EXPE NDITURE, BECAUSE THE SAME HAS TO BE SEEN ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS THE TESTS LAID DOWN BY VARIOUS COURTS FROM TIME TO TIME. THUS, RESPECTFULLY FOLLOWING THESE JUDGMENTS, WE HO LD THAT EXPENDITURE INCURRED ON THE SOFTWARE EXPENSES ARE R EVENUE IN NATURE AND AO WAS NOT JUSTIFIED IN DISALLOWING THE SAME. ACCORDINGLY DISALLOWANCE MADE BY THE AO, AMOUNTING TO ICICI SECURITIES PRIMARY D. LTD 54 RS.39,85,423/-, IS DIRECTED TO BE DELETED. CONSEQUE NTLY GROUND NO.7 OF ASSESSEES APPEAL IS ALLOWED. 19. GROUND NO.8 OF ASSESSEES APPEAL : THIS GROUND DEALS WITH THE ACTION OF LD. CIT(A) IN CONFIRMING THE ACT ION OF THE AO IN BRINING TO TAX THE INTEREST ON DEEP DISCOUNT BONDS AMOUNTING TO RS.1,97,84,788/-. THIS ISSUE HAS BEEN DECIDED BY US IN OUR ORDER FOR A.YS. 20001 & 2001-02. THE F ACTUAL MATRIX IS SAME AND FOLLOWING THE ORDER OF EARLIER Y EARS, THIS ADDITION IS DELETED AND CONSEQUENTLY GROUND NO.8 OF THE ASSESSEE APPEAL IS ALLOWED. 20. IN THE RESULT, THE APPEALS OF THE ASSESSEE AS WE LL AS REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. SD/- (JOGINDER SINGH ) SD/- (ASHWANI TANEJA) ' # / JUDICIAL MEMBER $ # / ACCOUNTANT MEMBER ( ,) MUMBAI; - DATED : 15/09/2015 CTX /. . . ! %'&'( )(*& / COPY OF THE ORDER FORWARDED TO : 1. /&' / THE APPELLANT 2. $%&' / THE RESPONDENT. 3. 0 0 ( 1 ( / ) / THE CIT, MUMBAI. 4. 0 0 ( 1 / CIT(A)- , MUMBAI 5. 34 $! , 0 /+ ! 5 , ( ,) / DR, ITAT, MUMBAI 6. 6' 7) / GUARD FILE. ! / BY ORDER, %3/ $ //TRUE COPY// +/, - (DY./ASSTT. REGISTRAR) , ( ,) / ITAT, MUMBAI